Management Official Interlocks

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 711

Management Official Interlocks

AGENCY: National Credit Union Administration.

ACTION: Final rule.

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SUMMARY: NCUA is revising its rules regarding management interlocks

between credit unions and other types of depository institutions. The

final rule, like the current regulation, does not apply when a credit

union shares a management official with another credit union. The final

rule conforms the interlocks rules to recent statutory changes,

modernizes and clarifies the rules, and reduces unnecessary regulatory

burdens where feasible, consistent with statutory requirements.

EFFECTIVE DATE: September 27, 1996.

FOR FURTHER INFORMATION CONTACT: Jeffrey Mooney, Staff Attorney (703/

518-6563), Office of General Counsel, or Kimberly Iverson, Program

Officer (703/518-6375), Office of Examination and Insurance.

SUPPLEMENTARY INFORMATION:

Background

The Depository Institution Management Interlocks Act (12 U.S. C.

3201 et seq.) (Interlocks Act) prohibits certain management interlocks

between depository institutions. The Interlocks Act exempts

interlocking arrangements between two credit unions and therefore, in

the case of credit unions, only restricts interlocks between credit

unions and other depository institutions--banks and savings

associations.

The Riegle Community Development and Regulatory Improvement Act of

1994 (CDRI Act) amended the Interlocks Act by removing NCUA's broad

authority to exempt otherwise impermissible interlocks and replacing it

with the authority to exempt interlocks under more narrow

circumstances. The CDRI Act also required a depository organization

with a ``grandfathered'' interlock to apply for an extension of the

grandfather period if the organization wanted to keep the interlock in

place.

On March 25, 1996, the NCUA Board (Board) published a notice of

proposed rulemaking (proposal) (61 FR 12043) to implement these

statutory changes. In addition, the proposal permitted interlocks

involving two institutions located in the same relevant metropolitan

statistical area (RMSA) if the institutions were not also located in

the same community and if at least one of the institutions had total

assets of less than $20 million. Finally, the proposal streamlined and

clarified NCUA's interlocks rules in various respects.

The Final Rule and Comments Received

NCUA received eight comment letters; four from state leagues, three

from credit unions, and one from a national trade association. Seven of

the eight commenters supported the proposal. The commenter that

objected to the proposal thought the changes were unnecessary. A few

commenters, while supporting the proposal, requested guidance or

suggested changes as discussed later in this preamble. Most of the

provisions in the proposal received either no comments or favorable

comments. Accordingly, NCUA has adopted, with minor modifications, the

changes to the interlocks rules that were set forth in the proposal.

Authority, Purpose, and Scope

This section in NCUA's final rule identifies the Interlocks Act as

the statutory authority for the management interlocks regulation. It

also states that the purpose of the rules governing management

interlocks is to foster competition between unaffiliated institutions.

One commenter asked NCUA to include a statement that ``this part

does not apply to interlocking arrangements between credit unions.''

Language to that effect is provided in section 711.1(c).

Definitions

Anticompetitive Effect

The final rule defines the term ``anticompetitive effect'' to mean

``a monopoly or substantial lessening of competition,'' a definition

derived from the Bank Merger Act (12 U.S.C. 1828(c)). The term

``anticompetitive effect'' is used in the Regulatory Standards

exemption. Under the Regulatory Standards exemption, NCUA may approve a

request for an exemption to the Interlocks Act if, among other things,

the agency finds that continuation of service by the management

official does not produce an anticompetitive effect with respect to the

affected institution.

The statute does not define the term ``anticompetitive effect,''

nor does the legislative history to the CDRI Act point to a particular

definition. The context of the Regulatory Standards exemption suggests

that NCUA should apply the term ``anticompetitive effect'' in a manner

that permits interlocks that present no substantial lessening of

competition. By prohibiting an interlock that would result in a

monopoly or substantial lessening of competition, the definition

preserves the free flow of credit and other financial services that the

Interlocks Act is designed to protect.

Since the term anticompetitive effect is not used by the credit

union industry, NCUA requested comments on whether another definition

would be more appropriate. One commenter suggested that NCUA define

monopoly and substantial lessening of competition by using percentages.

The Board believes a percentage system would be arbitrary and has not

made the suggested change.

Two commenters asked NCUA to clarify what the agency would consider

an anticompetitive effect. The Board anticipates that it will make this

determination on a case-by-case basis. Nevertheless, NCUA will follow

Justice Department guidelines and precedents established by the

financial institution regulators where appropriate.\1\

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\1\ See e.g., the Office of the Comptroller of the Currency's

(OCC) Bank Merger Competitive Analysis Screen (OCC Advisory Letter

95-4, July 18, 1995); Department of Justice Merger Guidelines (49 FR

26823, June 29, 1984) (applied by the Federal Reserve Board (FRB));

and Federal Deposit Insurance Corporation (FDIC) Statement of

Policy: Bank Merger Transactions (54 FR 39045, Sept. 22, 1989).

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Area Median Income

The final rule defines ``area median income'' as the median family

income for the metropolitan statistical area (MSA) in which an

institution is located or the statewide nonmetropolitan median family

income if an institution is located outside an MSA. The term ``area

median income'' is used in the definition of ``low- and moderate-income

areas,'' which in turn is used in

[[Page 50699]]

the implementation of the Management Consignment exemption.

Critical

The final rule defines ``critical'' as being ``important to

restoring or maintaining a depository organization's safe and sound

operations.'' The term ``critical'' is used in the Regulatory Standards

exemption. Under that exemption, NCUA must find that a proposed

management official is critical to the safe and sound operations of the

affected institution. 12 U.S.C. 3207(b)(2)(A).

Neither the statute nor its legislative history defines

``critical.'' NCUA is concerned that a narrow interpretation of this

term would nullify the Regulatory Standards exemption. If someone were

``critical'' to the safe and sound operations of an institution only if

the institution would fail but for the service of the person in

question, the exemption would have little relevance, because the

standard would be impossible to meet. Given that Congress clearly

intended for the Regulatory Standards exemption to permit interlocks

under some circumstances, the question thus becomes how to define those

circumstances.

The Board believes that the definition of critical adopted in this

final rule is consistent with the legislative intent by insuring that

only persons of demonstrated expertise and importance to the

institution's safe and sound operations may serve pursuant to a

Regulatory Standards exemption.

One commenter supported the definition as proposed. Two commenters,

however, asked NCUA to clarify when the agency would consider a

management official critical. As discussed below, the Board has

established presumptions to determine when a person is critical to an

institution, therefore, it does not believe further clarification is

necessary.

Depository Institution

The final rule makes no substantive change to the definition of

``depository institution.''

Low- and Moderate-Income Areas

The final rule defines this term as a census tract (or, if an area

is not in a census tract, a block numbering area delineated by the

United States Bureau of the Census) in which the median family income

is less than 100 percent of the area median income. This term is used

in the Management Consignment exemption that permits an otherwise

impermissible interlock if the interlock would improve the provision of

credit to a low- and moderate-income area. The final rule clarifies

that NCUA will evaluate whether an area is low- or moderate-income by

comparing the median family income for the census tract to be helped

(or, if there is no census tract, the block numbering area delineated

by the United States Bureau of the Census) with the area median income.

Income data will be derived from the most recent decennial census.

Management Official

The final rule defines ``management official'' to include a senior

executive officer, a director, a branch manager, a trustee of an

organization under the control of trustees, or any person who has a

representative or nominee serving in such capacity. The definition

excludes (1) a person whose management functions relate either

exclusively to the business of retail merchandising or manufacturing or

principally to business outside the United States of a foreign

commercial bank and (2) a person excluded by section 202(4) of the

Interlocks Act (12 U.S.C. 3201(4)).

The final rule removes the phrase ``an employee or officer with

management functions,'' which appeared in the former rule. In its

place, NCUA has used the term ``senior executive officer'' as defined

by each agency in its regulation pertaining to the prior notice of

changes in senior executive officers, which implement section 212 of

the Federal Credit Union Act (FCU Act) (12 U.S.C. 1790a) as added by

section 914 of the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (FIRREA) (Pub. L. No. 101-73, 103 Stat. 183).

NCUA has made this change to eliminate the uncertainty and attendant

compliance burden created by the ambiguous term ``management

functions.'' The final rule incorporates specific illustrative examples

already found in NCUA's regulations of positions at depository

organizations that will be treated as senior executive officers. See 12

CFR Sec. 701.14. The Board believes that this definition will allow

depository organizations to identify impermissible interlocks with

greater certainty and thus will enhance compliance.

One commenter asked NCUA to place the text of the definition of

senior executive officer already found in section 701.14 in section

711.2. Another commenter asked NCUA to specifically exclude compliance

officers from the definition of management official.

NCUA has not adopted either suggested change. First, NCUA does not

believe adding the text of section 701.14 to section 711.2 is

necessary. References to other sections are common and do not increase

regulatory burden. Second, while NCUA believes that in most instances a

compliance officer will not be considered a management official, that

determination should be made after the individual's duties and

responsibilities have been evaluated.

Relevant Metropolitan Statistical Area

The final rule, like its predecessor, defines ``RMSA'' as an MSA, a

primary MSA, or a consolidated MSA that is not comprised of designated

primary MSAs. However, the final rule clarifies that this definition

will be used to the extent that the Office of Management and Budget

(OMB) defines and applies the terms MSA, primary MSA, and consolidated

MSA. This change reflects the fact that OMB defines ``consolidated

MSA'' to include two or more primary MSAs. Given that a consolidated

MSA, by OMB's definition, is comprised of primary MSAs, the reference

to a consolidated MSA in the Interlocks Act and NCUA's regulations is

inappropriate. The final rule enables NCUA to implement the statute in

a way that complies with both the spirit and the letter of the

Interlocks Act.

Representative or Nominee

The final rule defines ``representative or nominee'' as someone who

serves as a management official and has an obligation to act on behalf

of someone else. The final rule removes the rest of the definition that

appeared in the former rule, however, and inserts a statement that NCUA

will find that someone has an obligation to act on behalf of someone

else only if there is an agreement (express or implied) to do so. This

change clarifies that the determination of whether someone serves a

representative or nominee will depend on whether there is a basis to

conclude that an agreement exists to act on someone's behalf.

Prohibitions

The former rule prohibited interlocks under three circumstances.

First, no two unaffiliated depository organizations may have an

interlock if they (or their depository institution affiliates) have

depository institution offices in the same community. Second, a

depository organization may not have an interlock with any unaffiliated

depository organization if either depository organization has assets of

$20 million or more and the depository organizations (or depository

institution affiliates of either) have depository institution

[[Page 50700]]

offices in the same RMSA.\2\ Third, if a depository organization has

total assets exceeding $1 billion, it (and its affiliates) may not have

an interlock with any depository organization with total assets

exceeding $500 million (or affiliate thereof), regardless of location.

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\2\ A ``community'' as that term is defined in the rule is

smaller than an RMSA. There may be several communities in one RMSA.

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The final rule amends the restriction applicable to institutions

with assets equal to or exceeding $20 million to better conform to the

purposes of the Interlocks Act. Whereas the prior rule prohibited

interlocks in an RMSA if one of the organizations had total assets of

$20 million or more, the final rule applies the RMSA-wide prohibition

only if both organizations have total assets of $20 million or more.

Interlocks within a community involving unaffiliated depository

organizations will continue to be prohibited, regardless of the size of

the organizations.

The Board believes that this change is consistent with both the

language and the intent of the Interlocks Act. While the statute uses

the plural ``depository institutions'' in section 203(1) of the

Interlocks Act (12 U.S.C. 3202(1)), the wording in context is ambiguous

and neither the statute nor its legislative history compels the

conclusion that the interlock must involve two institutions with less

than $20 million in assets before the less restrictive prohibition

applies.

The Interlocks Act seeks to prohibit interlocks that could enable

two institutions to engage in anticompetitive behavior. However, an

institution with total assets of less than $20 million is likely to

derive most of its business from the community in which it is located

and is unlikely to compete with institutions that do not have offices

in that community. Therefore, an interlock involving one institution

with assets under $20 million and another institution with assets of at

least $20 million not in the same community is not likely to lead to

the anticompetitive conduct that the Interlocks Act is designed to

prohibit.

The Board believes that this change will promote rather than

inhibit competition. Expanding the pool of managerial talent for

institutions with assets under $20 million could enhance the ability of

smaller institutions to compete by improving the management of these

institutions.

One commenter objected to the proposed change asserting that it was

unnecessary. For the reasons stated above, NCUA disagrees with the

commenter and has included the changes in the final rule.

Interlocking Relationships Expressly Permitted by Statute

The final rule states the exemptions found in 12 U.S.C. 3204 (1)-

(8). The final rule reorders the exemptions set forth in the current

regulation in order to conform the list of exemptions to the list set

forth in the Interlocks Act.

Regulatory Standards Exemption

The final rule sets forth the requirements that a depository

organization must satisfy in order to obtain a Regulatory Standards

exemption. The rule implements the requirement regarding certification

by allowing a depository organization's board of directors (or the

organizers of a depository organization that is being formed) to

certify to NCUA that no other qualified candidate has been found after

undertaking reasonable efforts to locate qualified candidates who are

not prohibited from service under the Interlocks Act. If read narrowly,

the Interlocks Act could require a depository organization to evaluate

every person in a given locale that might be qualified and interested.

This would create a requirement that, in practice, would be impossible

to satisfy. Given that Congress would not have included an exemption

that would have no practical application, NCUA believes that the

``reasonable efforts'' standard is consistent with the legislative

intent.

The final rule also sets forth a presumption that NCUA will apply

when reviewing an application for a Regulatory Standards exemption.\3\

NCUA will presume that a person is critical to an institution's safe

and sound operations if NCUA also approved that individual under

section 914 of FIRREA and the institution in question either was a

newly chartered institution, failed to meet minimum capital

requirements, or otherwise was in a ``troubled condition'' as defined

in the reviewing agency's section 914 regulation at the time the

section 914 filing was approved.

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\3\ OCC, FRB, FDIC and the Office of Thrift Supervision also

will presume that an interlock will not have an anticompetitive

effect if it involves institutions that, if merged, would not

trigger a challenge from agencies on competitive grounds. Generally,

the agencies will not object to a merger on competitive grounds if

the post-merger Herfindahl-Hirschman Index (HHI) for the market is

less than 1800 and the merger increases the HHI by 200 points or

less. NCUA will not implement this presumption because there is no

statutory authority for credit unions to merge with other types of

depository institutions, and the typical HHI analysis does not

reflect the shares/deposits held by credit unions, therefore, any

HHI analysis involving credit unions would be meaningless.

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The final rule also addresses the duration of an interlock

permitted under the Regulatory Standards exemption. The statute does

not require that these interlocks terminate. In light of this open-

ended grant of authority, NCUA has not adopted a specific term for a

permitted exemption. Instead, NCUA may require an institution to

terminate the interlock if NCUA determines that the management official

in question either no longer is critical to the safe and sound

operations of the affected organization or that continued service will

produce an anticompetitive effect. NCUA will provide affected

organizations an opportunity to submit information before they make a

final determination to require termination of an interlock.

Grandfathered Interlocking Relationships--Removed

Section 338(a) of the CDRI Act authorizes NCUA to extend a

grandfathered interlock for an additional five years if the management

official in question satisfies the statutory criteria for obtaining an

extension.

The final rule removes the sections addressing the grandfather

exemption because they are unnecessary and redundant in light of the

statute. NCUA did not receive any requests to extend a grandfathered

interlock, and individuals who wished to extend the grandfather period

had until March 23, 1995 to apply for an exemption.

Management Consignment Exemption

The final rule implements the Management Consignment exemption, set

forth in section 209(c) of the Interlocks Act (12 U.S.C. 3207(c)), by

restating the statutory criteria with three clarifications. First, the

final rule states that NCUA considers a ``newly chartered institution''

to be an institution that has been chartered for less than two years at

the time it files an application for exemption. This standard is

consistent with NCUA's threshold for determining when an institution is

considered newly chartered.

Second, the final rule clarifies that the exemption available for

``minority- and women-owned institutions'' is available for an

institution that is owned either by minorities or women. In analyzing

the exemptions to the Interlocks Act that the federal banking agencies

have approved, the House Conference Report to the CDRI Act (H.R. Conf.

Rep. No. 652, 103d Cong., 2d Sess. 181 (1994)) (Conference Report)

states that the types of institutions that have received

[[Page 50701]]

exemptions include those that are ``owned by women or minorities.''

These exemptions ultimately were codified in the Interlocks Act.

Accordingly, NCUA has concluded that Congress intended the Management

Consignment exemption to assist institutions owned by women and/or by

minorities, but did not intend to require the institution to be owned

by both.

Third, the final rule permits an interlock if the interlock would

strengthen the management of either a newly chartered institution or an

institution that is in an unsafe or unsound condition. Section

209(c)(1)(C) of the Interlocks Act (12 U.S.C. 3207(c)(1)(C)) permits an

exemption if the interlock would ``strengthen the management of newly

chartered institutions that are in an unsafe or unsound condition.''

However, this provision contains what appears on its face to be an

error, given that an exemption limited to situations involving newly

chartered institutions that also are in an unsafe and unsound condition

would have no practical utility. NCUA will not approve an application

for a credit union charter unless the applicant seeking a charter can

demonstrate that the proposed new financial institution will operate in

a safe and sound manner for the foreseeable future. While there may be

an extraordinary instance where a newly chartered institution

immediately experiences unforeseen problems so severe that they

threaten the safety and soundness of that institution, there is nothing

in the legislative history to suggest that Congress intended to limit

the Management Consignment exemption to such rare instances.

Moreover, the legislative history of the CDRI Act suggests that

NCUA is to apply the Management Consignment exemption in cases

involving either newly chartered institutions or institutions that are

in an unsafe or unsound condition. The Conference Report notes that the

federal financial institution regulatory agencies have used their

exemptive authority to grant exemptions in limited cases where

institutions ``are particularly in need of management guidance and

expertise to operate in a safe and sound manner.'' Id. The Conference

Report goes on to state that ``Examples of exceptions permissible under

an agency management official consignment program include improving the

provision of credit to low- and moderate-income areas, increasing the

competitive position of minority- and women-owned institutions, and

strengthening he [sic] management of newly chartered institutions or

institutions that are in an unsafe or unsound condition.'' Id. at 182

(emphasis added).

Finally, Congress used the exemptions in NCUA's current rules as

the model for the Management Consignment exemption. See id. at 181-182.

These exemptions distinguish newly chartered institutions from

institutions that are in an unsafe or unsound condition. The reference

in the CDRI Act's legislative history to the current regulatory

exemptions suggests that Congress intended to codify these exemptions.

For these reasons, NCUA will permit Management Consignment

exemptions if the management official will strengthen either a newly

chartered institution or an institution that is in an unsafe or unsound

condition.

The final rule sets forth two presumptions that NCUA will apply in

connection with an application for an exemption under the Management

Consignment exemption. First, NCUA will presume that an individual is

capable of strengthening the management of an institution that has been

chartered for less than two years if NCUA approved the individual to

serve as a management official of that institution pursuant to section

914 of FIRREA. Second, NCUA will presume that an individual is capable

of strengthening the management of an institution that is in an unsafe

or unsound condition if NCUA approved the individual to serve under

section 914 as a management official of that institution at a time when

the institution was in a ``troubled condition.''

NCUA believes that presumptions of suitability are less valid when

applied to the other Management Consignment exemptions because there is

no reason to conclude that a management official approved under section

914 necessarily will improve the flow of credit to low- and moderate-

income areas or increase the competitive position of minority- or

women-owned institutions. Moreover, the final rule does not contain a

presumption regarding effects on competition, given that this is not a

factor to be considered by NCUA when reviewing an application for a

Management Consignment exemption.

The final rule sets forth the limits on the duration of a

Management Consignment exemption. The Interlocks Act limits a

Management Consignment exemption to two years, with a possible

extension for up to an additional two years if the applicant satisfies

at least one of the criteria for obtaining a Management Consignment

exemption. The final rule implements this limitation by requiring

interested parties to submit an application for an extension at least

30 days before the expiration of the initial term of the exemption and

by clarifying that the presumptions that apply to initial applications

also apply to extension applications.

Change in Circumstances

The final rule provides a 15-month grace period for

nongrandfathered interlocks that become impermissible due to a change

in circumstances. This period may be shortened by NCUA under

appropriate circumstances.

Paperwork Reduction Act

The Board has determined that the requirements of the Paperwork

Reduction Act do not apply.

Executive Order 12612

This final rule, like the current 12 CFR part 711 it would replace,

will apply to all Federally insured credit unions. The Board, pursuant

to Executive Order 12612, has determined, however, that this final rule

will not have a substantial direct effect on the States, on the

relationship between the national government and the States, or on the

distribution of power and responsibilities among various levels of

government. Further, this final rule will not preempt provisions of

State law or regulations.

Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act (RFA)

(5 U.S.C. 605(b)), the regulatory flexibility analysis otherwise

required under section 603 of the RFA (5 U.S.C. 603) is not required if

the head of the agency certifies that the rule will not have a

significant economic impact on a substantial number of small entities

and the agency publishes such certification and a succinct statement

explaining the reasons for such certification in the Federal Register

along with its final rule.

Pursuant to section 605(b) of the RFA, the Board hereby certifies

that this rule will not have a significant economic impact on a

substantial number of small entities. The Board expects that this rule

will not (1) Have significant secondary or incidental effects on a

substantial number of small entities or (2) create any additional

burden on small entities. The changes to the exemptions are required by

the Interlocks Act. The Board has added presumptions that will

streamline and simplify the application procedures for obtaining an

exemption from the Interlocks Act prohibitions, and have defined key

terms used in the

[[Page 50702]]

provisions implementing these exemptions in a way that is intended to

eliminate any unnecessary burden. As noted in the preamble discussion

of the changes made by the final rule, the Board has made substantive

changes that will permit more flexibility to institutions with total

assets of less than $20 million, clarified the circumstances under

which someone will be deemed to be a ``representative or nominee,'' and

amended the definition of ``senior management official'' so as to

provide greater clarity and to conform this definition with definitions

of similar terms used in other regulations.

The impact of these changes will be to minimize, to the extent

possible, the costs of complying with this final rule.

List of Subjects in 12 CFR Part 711

Antitrust, Credit unions, Holding companies.

By the National Credit Union Administration Board on September

18, 1996.

Becky Baker,

Secretary of the Board.

For the reasons set out in the preamble, NCUA revises part 711 of

chapter VII of title 12 of the Code of Federal Regulations to read as

follows:

PART 711--MANAGEMENT OFFICIAL INTERLOCKS

Sec.

711.1 Authority, purpose, and scope.

711.2 Definitions.

711.3 Prohibitions.

711.4 Interlocking relationships permitted by statute.

711.5 Regulatory Standards exemption.

711.6 Management Consignment exemption.

711.7 Change in circumstances.

711.8 Enforcement.

Authority: 12 U.S.C. 1757 and 3201-3208.

Sec. 711.1 Authority, purpose, and scope.

(a) Authority. This part is issued under the provisions of the

Depository Institution Management Interlocks Act (Interlocks Act) (12

U.S.C. 3201 et seq).

(b) Purpose. The purpose of the Interlocks Act and this part is to

foster competition by generally prohibiting a management official from

serving two nonaffiliated depository organizations in situations where

the management interlock likely would have an anticompetitive effect.

(c) Scope. This part applies to management officials of federally

insured credit unions. Section 711.4(c) exempts a management official

of a credit union from the prohibitions of the Interlocks Act when the

individual serves as a management official of another credit union.

Therefore, the Interlocks Act prohibitions contained in this part only

apply to a management official of a credit union when that individual

also serves as a management official of another type of depository

organization (usually a bank or thrift).

Sec. 711.2 Definitions.

For purposes of this part, the following definitions apply:

(a) Affiliate. (1) The term affiliate has the meaning given in

section 202 of the Interlocks Act (12 U.S.C. 3201). For purposes of

that section 202, shares held by an individual include shares held by

members of his or her immediate family. ``Immediate family'' means

spouse, mother, father, child, grandchild, sister, brother, or any of

their spouses, whether or not any of their shares are held in trust.

(2) For purposes of section 202(3)(B) of the Interlocks Act (12

U.S.C. 3201(3)(B)), an affiliate relationship involving a depository

institution based on common ownership does not exist if the appropriate

federal supervisory agency determines, after giving the affected

persons the opportunity to respond, that the asserted affiliation was

established in order to avoid the prohibitions of the Interlocks Act

and does not represent a true commonality of interest between the

depository organizations. In making this determination, the appropriate

Federal supervisory agency considers, among other things, whether a

person, including members of his or her immediate family, whose shares

are necessary to constitute the group owns a nominal percentage of the

shares of one of the organizations and the percentage is substantially

disproportionate to that person's ownership of shares in the other

organization.

(b) Anticompetitive effect means a monopoly or substantial

lessening of competition.

(c) Area median income means:

(1) The median family income for the metropolitan statistical area

(MSA), if a depository organization is located in an MSA; or

(2) The statewide nonmetropolitan median family income, if a

depository organization is located outside an MSA.

(d) Community means a city, town, or village, and contiguous or

adjacent cities, towns, or villages.

(e) Contiguous or adjacent cities, towns, or villages means cities,

towns, or villages whose borders touch each other or whose borders are

within 10 road miles of each other at their closest points. The

property line of an office located in an unincorporated city, town, or

village is the boundary line of that city, town, or village for the

purpose of this definition.

(f) Critical means important to restoring or maintaining a

depository organization's safe and sound operations.

(g) Depository holding company means a bank holding company or a

savings and loan holding company (as more fully defined in section 202

of the Interlocks Act (12 U.S.C. 3201) having its principal office

located in the United States.

(h) Depository institution means a commercial bank (including a

private bank), a savings bank, a trust company, a savings and loan

association, a building and loan association, a homestead association,

a cooperative bank, an industrial bank, or a credit union, chartered

under the laws of the United States and having a principal office

located in the United States. Additionally, a United States office,

including a branch or agency, of a foreign commercial bank is a

depository institution.

(i) Depository institution affiliate means a depository institution

that is an affiliate of a depository organization.

(j) Depository organization means a depository institution or a

depository holding company.

(k) District bank means any State bank operating under the Code of

Law of the District of Columbia.

(l) Low- and moderate-income areas means census tracts (or, if an

area is not in a census tract, block numbering areas delineated by the

United States Bureau of the Census) where the median family income is

less than 100 percent of the area median income.

(m) Management official. (1) The term management official means:

(i) A director;

(ii) An advisory or honorary director of a depository institution

with total assets of $100 million or more;

(iii) A senior executive officer as that term is defined in 12 CFR

701.14(b)(2), or a person holding an equivalent position regardless of

title;

(iv) A branch manager;

(v) A trustee of a depository organization under the control of

trustees; and

(vi) Any person who has a representative or nominee serving in any

of the capacities in this paragraph (m)(1).

(2) The term management official does not include:

(i) A person whose management functions relate exclusively to the

business of retail merchandising or manufacturing;

(ii) A person whose management functions relate principally to the

[[Page 50703]]

business outside the United States of a foreign commercial bank; or

(iii) A person described in the provisions of section 202(4) of the

Interlocks Act (12 U.S.C. 3201(4)) (referring to an officer of a State-

chartered savings bank, cooperative bank, or trust company that neither

makes real estate mortgage loans nor accepts savings).

(n) Office means a principal or branch office of a depository

institution located in the United States. Office does not include a

representative office of a foreign commercial bank, an electronic

terminal, or a loan production office.

(o) Person means a natural person, corporation, or other business

entity.

(p) Relevant metropolitan statistical area (RMSA) means an MSA, a

primary MSA, or a consolidated MSA that is not comprised of designated

primary MSAs to the extent that these terms are defined and applied by

the Office of Management and Budget.

(q) Representative or nominee means a natural person who serves as

a management official and has an obligation to act on behalf of another

person with respect to management responsibilities. NCUA will find that

a person has an obligation to act on behalf of another person only if

the first person has an agreement, express or implied, to act on behalf

of the second person with respect to management responsibilities. NCUA

will determine, after giving the affected persons an opportunity to

respond, whether a person is a representative or nominee.

(r) Total assets. (1) The term total assets means assets measured

on a consolidated basis and reported in the most recent fiscal year-end

Consolidated Report of Condition and Income.

(2) The term total assets does not include:

(i) Assets of a diversified savings and loan holding company as

defined by section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C.

1467a(a)(1)(F)) other than the assets of its depository institution

affiliate;

(ii) Assets of a bank holding company that is exempt from the

prohibitions of section 4 of the Bank Holding Company Act of 1956

pursuant to an order issued under section 4(d) of that Act (12 U.S.C.

1843(d)) other than the assets of its depository institution affiliate;

or

(iii) Assets of offices of a foreign commercial bank other than the

assets of its United States branch or agency.

(s) United States includes any State or territory of the United

States of America, the District of Columbia, Puerto Rico, Guam,

American Samoa, and the Virgin Islands.

Sec. 711.3 Prohibitions.

(a) Community. A management official of a depository organization

may not serve at the same time as a management official of an

unaffiliated depository organization if the depository organizations in

question (or a depository institution affiliate thereof) have offices

in the same community.

(b) RMSA. A management official of a depository organization may

not serve at the same time as a management official of an unaffiliated

depository organization if the depository organizations in question (or

a depository institution affiliate thereof) have offices in the same

RMSA and each depository organization has total assets of $20 million

or more.

(c) Major assets. A management official of a depository

organization with total assets exceeding $1 billion (or any affiliate

thereof) may not serve at the same time as a management official of an

unaffiliated depository organization with total assets exceeding $500

million (or any affiliate thereof), regardless of the location of the

two depository organizations.

Sec. 711.4 Interlocking relationships permitted by statute.

The prohibitions of Sec. 711.3 do not apply in the case of any one

or more of the following organizations or to a subsidiary thereof:

(a) A depository organization that has been placed formally in

liquidation, or which is in the hands of a receiver, conservator, or

other official exercising a similar function;

(b) A corporation operating under section 25 or section 25A of the

Federal Reserve Act (12 U.S.C. 601 et seq. and 12 U.S.C. 611 et seq.,

respectively) (Edge Corporations and Agreement Corporations);

(c) A credit union being served by a management official of another

credit union;

(d) A depository organization that does not do business within the

United States except as an incident to its activities outside the

United States;

(e) A State-chartered savings and loan guaranty corporation;

(f) A Federal Home Loan Bank or any other bank organized solely to

serve depository institutions (a bankers' bank) or solely for the

purpose of providing securities clearing services and services related

thereto for depository institutions and securities companies;

(g) A depository organization that is closed or is in danger of

closing as determined by the appropriate Federal depository

institutions regulatory agency and is acquired by another depository

organization. This exemption lasts for five years, beginning on the

date the depository organization is acquired; and

(h)(1) A diversified savings and loan holding company (as defined

in section 10(a)(1)(F) of the Home Owners' Loan Act (12 U.S.C.

1467a(a)(1)(F)) with respect to the service of a director of such

company who also is a director of an unaffiliated depository

organization if:

(i) Both the diversified savings and loan holding company and the

unaffiliated depository organization notify their appropriate Federal

depository institutions regulatory agency at least 60 days before the

dual service is proposed to begin; and

(ii) The appropriate regulatory agency does not disapprove the dual

service before the end of the 60-day period.

(2) The NCUA Board or its designee may disapprove a notice of

proposed service if it finds that:

(i) The service cannot be structured or limited so as to preclude

an anticompetitive effect in financial services in any part of the

United States;

(ii) The service would lead to substantial conflicts of interest or

unsafe or unsound practices; or

(iii) The notificant failed to furnish all the information required

by NCUA.

(3) The NCUA Board or its designee may require that any interlock

permitted under this paragraph (h) be terminated if a change in

circumstances occurs with respect to one of the interlocked depository

organizations that would have provided a basis for disapproval of the

interlock during the notice period.

Sec. 711.5 Regulatory Standards exemption.

(a) Criteria. NCUA may permit an interlock that otherwise would be

prohibited by the Interlocks Act and Sec. 711.3 if:

(1) The board of directors of the depository organization (or the

organizers of a depository organization being formed) that seeks the

exemption provides a resolution to NCUA certifying that the

organization, after the exercise of reasonable efforts, is unable to

locate any other candidate from the community or RMSA, as appropriate,

who:

(i) Possesses the level of expertise required by the depository

organization and who is not prohibited from service by the Interlocks

Act; and

(ii) Is willing to serve as a management official; and

(2) NCUA, after reviewing an application submitted by the

depository organization seeking the exemption, determines that:

(i) The management official is critical to the safe and sound

operations of the affected depository organization; and

[[Page 50704]]

(ii) Service by the management official will not produce an

anticompetitive effect with respect to the depository organization.

(b) Presumptions. NCUA applies the following presumptions when

reviewing any application for a Regulatory Standards exemption. A

proposed management official is critical to the safe and sound

operations of a depository institution if:

(1) That official is approved by NCUA to serve as a director or

senior executive officer of that institution pursuant to 12 CFR 701.14

or pursuant to conditions imposed on a newly chartered credit union;

and

(2) The institution had operated for less than two years, was not

in compliance with minimum capital requirements, or otherwise was in a

``troubled condition'' as defined in 12 CFR 701.14 at the time the

service under 12 CFR 701.14 was approved.

(c) Duration of interlock. An interlock permitted under this

section may continue until NCUA notifies the affected depository

organizations otherwise. NCUA may require a credit union to terminate

any interlock permitted under this section if NCUA concludes, after

giving the affected persons the opportunity to respond, that the

determinations under paragraph (a)(2) of this section no longer may be

made. A management official may continue serving the depository

organization involved in the interlock for a period of 15 months

following the date of the order to terminate the interlock. NCUA may

shorten this period under appropriate circumstances.

Sec. 711.6 Management Consignment exemption.

(a) Criteria. NCUA may permit an interlock that otherwise would be

prohibited by the Interlocks Act and Sec. 711.3 if NCUA, after

reviewing an application submitted by the depository organization

seeking an exemption, determines that the interlock would:

(1) Improve the provision of credit to low- and moderate-income

areas;

(2) Increase the competitive position of a minority- or women-owned

depository organization;

(3) Strengthen the management of a depository institution that has

been chartered for less than two years at the time an application is

filed under this part; or

(4) Strengthen the management of a depository institution that is

in an unsafe or unsound condition as determined by NCUA on a case-by-

case basis.

(b) Presumptions. NCUA applies the following presumptions when

reviewing any application for a Management Consignment exemption:

(1) A proposed management official is capable of strengthening the

management of a depository institution described in paragraph (a)(3) of

this section if that official is approved by NCUA to serve as a

director or senior executive officer of that institution pursuant to 12

CFR 701.14 or pursuant to conditions imposed on a newly chartered

credit union and the institution had operated for less than two years

at the time the service under 12 CFR 701.14 was approved; and

(2) A proposed management official is capable of strengthening the

management of a depository institution described in paragraph (a)(4) of

this section if that official is approved by NCUA to serve as a

director or senior executive officer of that institution pursuant to 12

CFR 701.14 and the institution was in a ``troubled condition'' as

defined under 12 CFR 701.14 at the time service under that section was

approved.

(c) Duration of interlock. An interlock granted under this section

may continue for a period of two years from the date of approval. NCUA

may extend this period for one additional two-year period if the

depository organization applies for an extension at least 30 days

before the current exemption expires and satisfies one of the criteria

specified in paragraph (a) of this section. The provisions set forth in

paragraph (b) of this section also apply to applications for

extensions.

Sec. 711.7 Change in circumstances.

(a) Termination. A management official shall terminate his or her

service or apply for an exemption to the Interlocks Act if a change in

circumstances causes the service to become prohibited under that Act. A

change in circumstances may include, but is not limited to, an increase

in asset size of an organization, a change in the delineation of the

RMSA or community, the establishment of an office, an acquisition, a

merger, a consolidation, or any reorganization of the ownership

structure of a depository organization that causes a previously

permissible interlock to become prohibited.

(b) Transition period. A management official described in paragraph

(a) of this section may continue to serve the depository organization

involved in the interlock for 15 months following the date of the

change in circumstances. NCUA may shorten this period under appropriate

circumstances.

Sec. 711.8 Enforcement.

Except as provided in this section, NCUA administers and enforces

the Interlocks Act with respect to federally insured credit unions, and

may refer any case of a prohibited interlocking relationship involving

these entities to the Attorney General of the United States to enforce

compliance with the Interlocks Act and this part.

[FR Doc. 96-24459 Filed 9-26-96; 8:45 am]

BILLING CODE 7535-01-P