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FED ER AL RESERVE BANK O F NEW YORK r Circular No. 8 5 1 5 1 L February 7, 1979 J Comment Invited on Proposed New Regulation To Implement Depository Institution Management Interlocks Act T o A l l S ta te M e m b e r B a n k s and B a n k H o ld in g C o m p a n ies, an d O t h e r s C o n c e r n e d , in th e S e c o n d F e d e r a l R e s e r v e D i s t r i c t : The Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Home Loan Bank Board, and the National Credit Union Administration have announced proposed regulations to carry out the new Deposi tory Institution Management Interlocks Act, which becomes effective March 10, 1979. Following is the text of the announcement: The Government agencies that supervise federally insured depository institutions today [January 30] proposed regulations to carry out the new Depository Institution Management Interlocks Act, (Title II of the Financial Institutions Regulatory and Interest Rate Control A ct of 1978). Public comment on the proposal should be received by March 5, 1979. The Act, which becomes effective March 10, 1979, prohibits certain interlocking relationships of manage ment officials— including officers and directors— among nonaffiliated depository institutions, including bank holding companies and savings and loan holding companies. The proposed regulation would establish four classes of exemptions from the A ct’s prohibitions against interlocks, where competition is not present and where public benefits would outweigh competitive factors. The proposed regulation also defines key terms used in the Act. ih e draft regulation is identical for all the agencies concerned, with the exception of technical varia tions (such as the names of the agencies and designations of the depository institutions they supervise). The A ct generally prohibits the following types of interlocks: — Except for institutions with assets of less than $20 million, a management official of a depository in stitution or a depository holding company may not serve as a management official of a nonaffiliated depository institution or holding company with an office in the same standard metropolitan statistical area (S M S A ). — Regardless of the size of the depository institution or holding company, a management official of one such institution may not serve in a similar capacity with another such institution if the institutions have offices in the same or a contiguous or an adjacent city, town or village. —-Whatever the geographic location, a management official of a depository institution or holding com pany with assets exceeding $1 billion may not serve at the same time as a management official of a nonaffiliated depository institution or holding company with assets exceeding $500 million, or an af filiate of such an institution. The A ct makes an exception permitting a management official interlock between two credit unions. The agencies proposed that the following four exemptions to the above prohibitions could be granted by the appropriate regulators, with their specific prior approval. 1. Exceptions could be granted, for up to five years, in the case of institutions that: — A re located in low income or economically depressed areas; — A re controlled or managed by members of minority groups, or — Are controlled or managed by women. The purpose of these exceptions is to provide temporary assistance from experienced management if it appears to be needed and is desired, in order to encourage development of financial institutions in low in come areas and broaden management opportunities available to minorities and women. 2. In the case of new institutions, temporary exceptions— up to two years— could be granted by the agencies, where necessary and desired, to provide new institutions with experienced management to help them get started, with the expectation that such new institutions would increase the convenience and other benefits to the public of added competition. 3. The agencies could also grant exceptions to depository institutions in a deteriorating condition, to help prevent any decrease in public benefits and convenience resulting from further deterioration. 4. The agencies could grant exceptions to credit unions sponsored by depository institutions or deposi tory holding companies primarily to serve the employees of the sponsoring institution or its affiliates. This exception is proposed on the ground that in these circumstances no competition would exist. The A ct defines management official as an employee or officer who has management functions, a direc tor (including an honorary director or an advisory director) or anyone who has a representative or nominee serving as a management official. A ny individual whose service as a management official began before November 10, 1978 and who was not in violation of section 8 of the Clayton (anti-trust) A ct, would be allowed to continue in that position until November 10, 1988. W here a change in circumstances makes service by a management official con trary to the provisions of the new Act, the agencies could grant delays up to 15 months for compliance. The A ct defines depository institutions as including commercial banks, savings and loan associations, savings banks, trust companies, building and loan associations, homestead associations, cooperative banks, in dustrial banks and credit unions. Depository holding companies are defined as including bank holding com panies and savings and loan holding companies. Those parts of the Clayton Act affecting interlocking management relationships between banks are left unchanged by the new Act, and the Federal Reserve Board’s Regulation L, which implements section 8 of the Clayton Act, continues in effect at least for the time being. The proposed five-agency regulation would make the following key definitions: — Adjacent: Cities, towns or villages that are within 10 miles of one another at their closest point. — Office: The A ct includes principal offices and branches of depository institutions or depository hold ing companies. Electronic terminals would be excluded from the definition of office by the proposed regulation. — Affiliates: One of the statutory definitions of “ affiliate” requires common beneficial ownership of more than 50 per cent of the voting shares of the corporations involved by groups claiming common own ership. The new A ct permits interlocking relationships among affiliated corporations. T o avoid circumvention of the intent of the A ct, the agencies proposed a rebuttable presumption that an affiliate relationship does not exist unless each member of a group that asserts such common beneficial ownership owns at least 5 per cent of the voting shares of each corporation involved. The agencies asked in particular for comment on the following: — Comment that would help the agencies develop criteria for overcoming the presumption that an affili ate relationship does not exist if the proposed 5 per cent ownership standard is not met, and to determine in which circumstances the proposed presumption might not be applied. — W hether the proposed exclusion of electronic terminals from the definition of “ office” is appropriate. — Whether the A ct should be applied to foreign banks in the United States. Both the A ct and its leg islative history are silent on this point. — Whether there should be other exceptions to the A ct’s prohibitions. Printed on the following pages is an excerpt from the F e d e r a l R e g i s t e r of February 1, 1979, containing the text of the Board of Governors’ proposed Regulation LL. Comments thereon should be submitted by March 5, 1979, and may be sent to our Regulations Division. P a u l A. V o l c k e r , President. 2 [6210-01-M ] FEDERAL RESERVE SYSTEM [12 CFR Part 238] DEPARTMENT OF THE TREASURY Comptroller of the Currency [12 CFR Part 26] FEDERAL DEPOSIT INSURANCE CORPORATION [12 CFR Part 348] FEDERAL HOME LOAN BANK BOARD [12 CFR Part 563f] NATIONAL CREDIT UNION ADMINISTRATION [12 CFR Part 711] [Docket No. R-0198] MANAGEMENT OFFICIAL INTERLOCKS Proposed Regulations for Implementation AGENCIES: Boatd of Governors of the Federal Reserve System, Comp troller of the Currency, Federal De posit Insurance Corporation, Federal Home Loan Bank Board, and National Credit Union Administration. A CTIO N : Proposed regulations. SU M M A R Y : These proposed regula tions would implement the Depository Institution Management Interlocks Act (Title II of the Financial Insitutions Regulatory and Interest Rate Control Act of 1978), which prohibits certain management official interlocks between depository institutions, de pository holding companies, and their affiliates. Among other things, the regulations would permit, under cer tain circumstances, service by a man agement official that would otherwise be prohibited by the Act. DATE: Comments must be received on or before March 5, 1979. A D D R E SS: Interested persons are in vited to submit written data, views or arguments regarding the proposed reg ulations. Please send one copy of your comments to Theodore E. Allison, Sec retary of the Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N .W ., Washington, D,C, 20551. All material submitted should refer to F.R.B. Docket No. R -0198. All comments re ceived will be made available for public inspection. FO R FU R TH E R C O NTACT: IN F O R M A T IO N John Walker (202) 452-2418, or Allan Schott (202) 452-3779, Board of Governors of the Federal Reserve System: David Roderer (202) 4471880, Office of the Comptroller of the Currency: Pamela LeCren (202) 389-4433, Federal Deposit Insurance Corporation: Kathleen Topelius (202) 377-6444, Federal Home Loan Bank Board; Ross Kendall (202) 6324870, National Credit Union Admin istration. SU P P LE M E N TA R Y IN FO R M A TIO N : The Depository Institution Manage ment Interlocks Act (the “ A ct” ) was enacted as Title II of the Financial In stitutions Regulatory and Interest Rate Control Act of 1978 (Pub. L. 95630). The purpose of the Act is to foster competition among depository institutions, depository holding com panies, and their affiliates. The Act provides that: (1) Except with respect to institutions with assets of less than $20 million, a man agement official (defined as an employee or officer with management functions, a direc tor, or any person who has a representative or nominee serving in such a capacity) of a depository institution, depository holding company, or depository institution affiliate of such institutions may not serve as a man agement official of a nonaffiliated deposi tory institution, depository holding compa ny, or depository institution affiliate of such institutions that has an office located in the same Standard Metropolitan Statisti cal Area (SMSA) (§ 203); (2) Regardless of the size of the institu tions involved, a management official of a depository institution, depository holding company, or depository institution affiliate of such institutions may not serve as a man agement official of a nonaffiliated deposi tory institution, depository holding compa ny, or depository institution affiliate of such institutions if both institutions have offices located in the same or a contiguous or an adjacent city, town or village (§ 203); and Notwithstanding geographic location, in terlocking management relationships are prohibited between any depository institu tion or depository holding company with total assets exceeding $1 billion, or any affil iate of such institutions, and any nonaffi liated depository institution or depository holding company with total assets exceed ing $500 million, or any affiliate of such in stitutions (§ 204). Any management official who was serving as such prior to November 10, 1978, and whose service was not in vio lation of section 8 of the Clayton Act (15 U.S.C. 19) on that daJte, is not pro hibited by the Act from continuing in that position until November 10, 1988 (§ 206). The Comptroller of the Currency, the board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, The Federal Home Loan Bank Board, and the Na tional Credit Union Administration (the “ agencies” ) are designated to ad minister and enforce the Act with re spect to the institutions they regulate (§ 207) and are authorized to promul gate rules and regulations which permit service otherwise prohibited under the Act (§ 209). The agencies are proposing substan tially identical regulations containing only those technical variations neces sary to accomodate the different types of depository institutions regulated by each agency. In order to provide clarity, the pro posed regulations define the term “ ad jacent” as used in Section 203 of the Act. Similarly, the concept of a bank er’s bank is clarified in the proposed regulations. The term “ office” has been defined to exclude electronic ter minals. The regulations would permit sever al types of interlocking relationships which may be appropriate in certain instances because of anticipated com munity benefits from the promotion of such institutions or because the in stitutions do not in fact compete with each other. It should be emphasized, however, that in each enumerated in stance, specific approval must be ob tained from each of the agencies charged with supervision of the insti tutions. The proposed exceptions relating to institutions located in low income areas, or controlled or managed by persons who are members of minority groups or by women are substantially similar to existing exceptions con tained in subparts 212.3(g) and (h) of Regulation L of the Board of Gover nors (12 CFR 212.3(g), (h)). These ex ceptions are designed to permit limited interlocking relationships for no more than five years. These exceptions may be permitted only with specific ap proval of the appropriate agencies and are subject to such other terms and FEDERAL REGISTER, V O L 44, NO. 23— THURSDAY, FEBRUARY 1, 1979 3 conditions as may be imposed by the agencies. Other exceptions would permit in terlocking relationships, when deter mined by the appropriate agency or agencies to be necessary, to provide adequate management or operating expertise to a new or deteriorating in stitution. In the case of a new institu tion, no interlock would be permitted for more than two years after the in stitution commences business. In the case of either a new or a deteriorating institution, other terms and conditions that the agency or agencies believe necessary may be imposed. W here a depository institution or de pository holding company sponsors a credit union primarily to serve the needs of its employees and those of its affiliates, a specific exemption has been proposed which recognizes that the two institutions do not compete with each other. Interlocking relationships between affiliated corporations are excluded from the prohibitions of the Act. One of the statutory definitions of the term “ affiliate” requires common beneficial ownership of more than 50 per cent of the voting shares of corpo rations involved. In order to prevent circumvention of the intent of the Act, the proposed regulations would estab lish a rebuttable presumption that each member of a group that asserts such common ownership must own at least 5 per cent of the voting shares of each corporation. Comment is specifi cally requested to assist the agencies in developing criteria sufficient to overcome the presumption in those cases where an individual does not meet the 5 per cent qualifying stand ard, and to determine in which specific circumstances the presumption should not be applied at all. The agencies particularly request specific comment on the application of the Act to nondepository affiliates of depository institutions, including di versified depository holding compa nies, in circumstances where such af filiates do not in fact compete with any nonaffiliated depository institu tion. The proposed regulations do not at tempt to interpret application of the Act to interlocking relationships in volving foreign banks. Comment is specifically requested on the potential impact of the Act upon such relation ships. Finally, the proposed regulations provide for the exclusion of electronic fund transfer terminals from the term “ office” . Such an exclusion would help to prevent disruption and delay in the establishment of new payment sys tems where permitted by State law. However, the agencies are specifically requesting comment on the appropri ateness of this approach or whether this issue should be resolved in an other way, for example, by limiting the exclusion to terminals that are shared with another depository insti tution. To aid in implementation of the Act, interested persons are also invited to submit relevant data, views, and com ments on any other matter thought to be appropriate for further agency action, including other possible excep tions consistent with the purposes of the Act. Although the agencies contemplate the adoption of a final regulation to be effective on March 10, 1979, subse quent amendments may be adopted as determined to be appropriate upon review of public comments. Interested persons are encouraged to file com ments at the earliest possible date in order to facilitate prompt adoption of regulations. The Administrator of the National Credit Union Administration would like to emphasize that the 'Act and Regulations affect Federally-insured credit unions differently, in some re spects, than other depository institu tions. First, the Act provides that its prohibitions on management official interlocks do not apply to a credit union being served by a management official of another credit union. There fore, the Act will only affect credit unions when a management official of a credit union serves in a management capacity with another type of deposi tory institution, or depository holding company, or with an affiliate of either such institution. Second, because each credit union member, regardless of the number of shares owned, has only one vote, a credit union will never be sub ject to the control of any one individu al or holding company. An affiliate re lationship based on common owner ship by one or more individuals of two corporations will, therefore, never exist in the case of a credit union. And finally, while Federal law and regula tions prohibit a Federally-chartered credit union from owning shares in an other depository institution, some State statutes allow state-chartered credit unions to purchase stock in other depository institutions. A statechartered credit union that is Federal ly-insured and holds enough stock in a depository institution to qualify as a depository holding company would be subject to the rules promulgated by the Federal Reserve Board pertaining to depository holding companies in ad dition to rules pertaining to credit unions. In adopting the Act, Congress left untouched section 8 of the Clayton Act, which also contains prohibitions against certain interlocking relation ships. W hile the two statutes pverlap in many respects, there are significant differences. For example, although 4 section 8 of the Clayton Act prohibits interlocks between a member bank and another bank, it does not prohibit interlocks between a member bank and a thrift institution. In proposing its regulation, the Federal Reserve Board has not attempted to reconcile its regulations under the two statutes for several reasons. First, the Federal Reserve Board wishes to propose regu lations that are uniform among the other Federal regulatory agencies af fected by the Act, and these other agencies do not have jurisdiction under the Clayton Act. Second, differ ing proposals at this time might lead to confusion that would make public comment less fruitful and interfere with the goal of inter-agency coordina tion. The Federal Reserve Board will consider reconciling the two sets of regulations at the time it takes final action on the regulations proposed herein. However, if it is not feasible to do so at that time, an individual would be bound by both sets of regulations and by whichever is the more restric tive. The Federal Home Loan Bank Board will similarly consider reconcil ing its final regulations based on this proposal with §563.33 of the Regula tions of the Federal Savings and Loan Insurance Corporation concerning composition of the board of directors of an insured institution. If it is not feasible to do so at that time, an indi vidual would be bound by both sets of regulations and by whichever is the more restrictive. In proposing these regulations, the Federal Reserve Board has not fol lowed all of the expanded rulemaking procedures set forth in its policy state ment of January 15, 1979. These regu lations were initiated before the policy statement was adopted and expedited action is necessary to meet the effec tive date of the Act. Similarly, because the Act shall become effective on March 10, 1979, the Comptroller of the Currency has determined, in ac cordance with the existing procedures of the Department of Treasury regard ing the issuing of regulations, that a 30-day time period for comment on the proposed regulation is appropriate in this instance in order to expedite the adoption of a regulation. Some of the prohibitions of the Act depend upon whether a depository or ganization is located in a Standard Metropolitan Statistical Area (SM SA). For the benefit of those who may be unfamiliar with the current defini tions of SM SAs, the Board will make available upon request, at no charge, a list of current SM SAs. Persons who are interested in this list should con tact the Secretary of the Federal R e serve Board. Accordingly, the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Fed- eral Deposit Insurance Corporation, the Federal Home Loan Bank Board, and the National Credit Union Admin istration propose to amend 12 CFR by adding Parts 238, 26, 348, 563f, and 711, respectively, to read as set forth below: F ederal R eserve S ystem [12 CFR Fart 238] [REGULATION LL] PART 238— MANAGEMENT OFFICIAL INTERLOCKS Sec. 238.1 238.2 238.3 238.4 Authority, purpose and scope. Definitions. Permitted relationships. Common control. A uthority : Depository Institution Man agement Interlocks Act, 92 Stat. 3672 (12 U.S.C. 3201 et seq.). § 238.1 Authority, purpose and scope. (a) Authority. This Part is based upon and issued pursuant to the provi sions of the Depository Institution Management Interlocks Act (“A ct” ) (92 Stat. 3672, 12 U.S.C. 3201 et seq.). (b) Purpose and scope. The purpose of the Act and this Part is to foster competition among depository institu tions, depository holding companies, and their affiliates. The Act provides, with certain exceptions, that a man agement official of a depository insti tution, depository holding company, or depository institution affiliate of either such institution, may not serve in such capacity with any other such institution that is not affiliated there with if: (1) offices of such institutions are located within the same Standard Metropolitan Statistical Area (“ S M S A ” ) and either such institution has assets of $20 million or more; or (2) regardless of asset size, offices of such institutions are located within the same city, town, or village, or any city, town, or village contiguous or ad jacent thereto. Notwithstanding geo graphic location, the Act also provides, with certain exceptions, that a man agement official of a depository insti tution or depository holding company having total assets exceeding $1 bil lion, or any affiliate of either such in stitution, may not serve in such capac ity with any other nonaffiliated de pository institution or depository holding company having total assets exceeding $500 million, or any affiliate thereof. Any person whose service as a man agement official of a depository insti tution, depository holding company, or any affiliate thereof, began prior to November 10, 1978, and was not imme diately prior to that date in violation of section 8 of the Clayton Act (15 U.S.C. § 19), is not prohibited from continuing to serve in such capacity (b) Newly-chartered institution A management official of a State member bank, bank holding company, or any affiliate thereof, may serve at the same time as a management offi cial of not more than one other de pository institution or depository holding company, subject to the fol lowing conditions: (1) no interlocking relationship permitted by this para graph shall continue for more than § 238.2 Definitions. two years after such other institution (a) “ Depository institution” , “ deposi commences business; (2) the appropri tory holding company” , “ affiliate”, ate Federal regulatory agency or agen and “management official” have the cies determine such relationship to be meanings provided in section 202 of necessary to provide management or the Act. operating expertise to such other insti (b) “Adjacent”, as used in section tution; and (3j such other conditions 203 of the A c t ,, means that cities, as may be determined by the appropri towns or villages are less than 10 miles ate Federal regulatory agency or agen apart at their closest points. cies in any specific case. (c) “ O ffice”, as used with reference (c) Conditions endangering safety or to a depository institution in section 202 of the Act, means either a princi soundness. A management official of a pal office or a branch, but does not in State member bank, bank, holding clude an electronic terminal. company, or any affiliate thereof, may (d) “Any other bank organized spe serve at the same time as a manage cifically to serve depository institu ment official of not more than one tions” , or “ banker’s bank”, as used in other depository institution or deposi section 205 of the Act, means any tory holding company if the Federal bank engaged solely in serving deposi regulatory agency that regulates such tory institutions. other institution has reason to believe § 238JJ Permitted relationships. that conditions exist that may endan ger the safety or soundness of such The Act authorizes the Board to pre scribe regulations permitting service other institution, subject to the fol by a management official that would lowing conditions: (1) the appropriate otherwise be prohibited by the Act Federal regulatory agency or agencies with respect to State member banks, determine such relationship to be nec bank holding companies, and any affil essary to provide management or oper iate thereof. Upon request for its prior ating expertise to such other institu approval, the Board may permit not tion; and (2) such other conditions as more than one of the following classi may be determined by the appropriate fications of relationships in the case of Federal regulatory agency or agencies any one individual: (a) Institution in low income area; in any specific case. (d) Institution sponsoring credit m inority institution. A management u n ion A management official of a official of a State member bank, bank holding company, or any affiliate State member bank, bank holding thereof, may serve at the same time as company, or any affiliate thereof, may a management official of not more serve at the same time as a manage than one other depository institution ment official of a Federally-insured or depository holding company locat credit union that is sponsored by the ed, or to be located, in a low income or State member bank, bank holding other economically depressed area; or company, or an affiliate thereof, pri as a management official of not more marily to serve employees of such in than one other depository institution stitutions. or depository holding company that is controlled or managed by persons who § 238.4 Common control. are members of minority groups or by Unless otherwise demonstrated to women, subject to the following condi tions: (1) The appropriate Federal reg the satisfaction of the appropriate ulatory agency or agencies determine Federal regulatory agency or agencies, such relationship to be necessary to it is presumed that an “affiliate” rela provide management or operating ex tionship does not exist under section pertise to such other institution; i 2) no 202(3 KB) of the Act unless each of the interlocking relationship permitted by persons who beneficially own in the this paragraph shall continue for more aggregate more than 50 per cent of than five years; and (3) such other the voting shares of each corporation conditions as may be determined by beneficially owns 5 per cent or more of the appropriate Federal regulatory the voting shares of each corporation. agency or agencies in any specific case. with such institution until November 10, 1988. The Board of Governors of the Federal Reserve System adminis ters and enforces the Act with respect to State member banks, bank holding companies, and their affiliates, and may refer the case of a prohibited in terlocking relationship involving any such institution to the Attorney Gen eral to enforce compliance with the Act and this Part. 5
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