Management Official Interlocks

SUMMARY: The National Credit Union Administration (NCUA) is proposing

to revise its rules regarding management interlocks between credit

unions and other financial institutions. The proposal conforms the

interlocks rules to recent statutory changes, modernizes and clarifies

the rules, and reduces unnecessary regulatory burdens where feasible,

consistent with statutory requirements.

DATES: Comments must be received by May 24, 1996.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the

Board. Mail or hand-deliver comments to: National Credit Union

Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax

comments to (703) 518-6319. Post comments on NCUA's electronic bulletin

board by dialing (703) 518-6480. Please send comments by one method

only.

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

Summary of Statutory Changes

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 credit unions and therefore, in the

case of credit unions, only restricts interlocks between credit unions

and other institutions--banks and thrifts.

The Riegle Community Development and Regulatory Improvement Act of

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

the other banking agencies' \1\ 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.\2\

\1\ The NCUA participated in an interagency effort to revise the

management interlocks regulations. The other banking agencies, the

Office of the Comptroller of the Currency, the Office of Thrift

Supervision, the Federal Reserve Board and the Federal Deposit

Insurance Corporation have already published proposed revisions to

their respective management interlocks regulations in a joint notice

of proposed rulemaking. (See 60 FR 67424, December 29, 1995).

\2\ The NCUA did not receive any requests for extensions,

therefore, the provision regarding extending the grandfather period

is moot for purposes of this regulation.

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After the changes made by the CDRI Act, a person subject to the

Interlocks Act's restrictions seeking an exemption from those

restrictions must qualify either for a ``regulatory standards''

exemption or an exemption under a ``management official consignment

program'' (the Management Consignment exemption). An applicant seeking

a regulatory standards exemption must submit a board resolution

certifying that no other candidate from the relevant community has the

necessary expertise to serve as a management official, is willing to

serve, and is not otherwise prohibited by the Interlocks Act from

serving. Before granting the exemption request, the NCUA must find that

the individual is critical to the institution's safe and sound

operations, that the interlock will not produce an anticompetitive

effect, and that the management official meets any additional

requirements imposed by the agency. Under the Management Consignment

exemption, the NCUA or appropriate agency may permit an interlock that

otherwise would be prohibited by the Interlocks Act if the agency

determines that the interlock would improve the provision of credit to

low- and moderate-income areas, increase the competitive position of a

minority- or woman-owned institution, or strengthen the management of a

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

unsound condition. (See text following ``Management Consignment

exemption'' in this preamble for a discussion regarding interlocks

involving newly chartered institutions or institutions that are in an

unsafe or unsound condition).

The proposal reflects these statutory changes, and streamlines and

clarifies the interlocks regulations in various respects. These changes

are discussed in the text that follows. The NCUA invites comments on

all aspects of this proposal.

The following is a section-by-section discussion of the proposed

rule changes.

Authority, Purpose, and Scope

This section identifies the Interlocks Act as the statutory

authority for the management interlocks regulation. There are no

significant changes from the current authority, purpose and scope rule.

It also states that the purpose of the rules governing management

interlocks is to foster competition between unaffiliated institutions.

Finally, this section currently identifies the types of institutions to

which NCUA's regulation applies.

Definitions

The NCUA's current regulation sets forth definitions of key terms

used in the regulation. The proposed regulation changes some of the

current definitions. A discussion of the substantive differences

between the current rule and proposal follows.

Anticompetitive Effect

The current regulation neither uses nor defines the term

``anticompetitive effect.'' The proposed regulation defines the term to

mean ``a monopoly or substantial lessening of competition.'' This term

is used in the regulatory standards exemption. Under that exemption,

the NCUA may approve a request for an exemption to the Interlocks Act

if, among other things, the NCUA finds that continuation of service by

the management official does not produce an anticompetitive effect with

respect to the affected credit union. The statute does not define the

term ``anticompetitive effect,'' nor does the legislative history to

the CDRI Act point to a particular definition.

[[Page 12044]]

The context of the regulatory standards exemption suggests,

however, that the NCUA and other agencies 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 proposed definition preserves the free flow of credit

and other banking services that the Interlocks Act is designed to

protect. While the proposed definition is familiar to the banking

industry since it is derived from the Bank Merger Act (12 U.S.C.

1828(c)), it is not used by the credit union industry. Therefore, NCUA

requests comment on whether another definition would be more

appropriate for interlocks between credit unions and other types of

depository institutions.

Area Median Income

The current regulation does not use the term ``area median

income,'' and, therefore, does not define this term. The proposed

regulation 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. This term is used in the

definition of ``low- and moderate-income areas,'' which in turn is used

in the implementation of the Management Consignment exemption.

Contiguous or Adjacent Cities, Towns, or Villages

The current regulation defines ``adjacent cities, towns, or

villages'' as cities, towns, or villages whose borders are within 10

road miles from each other. It also defines ``contiguous cities, towns,

or villages'' as cities, towns, or villages whose borders touch. The

statute and regulation apply these terms to prohibit interlocks

involving small institutions that are located in contiguous or adjacent

cities, towns, or villages. The proposed regulation combines these two

definitions, given that contiguous cities, towns, or villages

necessarily are within 10 miles of each other.

Critical

The current regulation neither uses nor defines ``critical.'' The

proposed regulation defines the term in connection with the regulatory

standards exemption. Under that exemption, the 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 define

``critical.'' The 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 practically 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.

This proposal addresses the issue by stating that the NCUA will

consider a person to be critical to a depository organization if the

person will play an important role in helping the institution either

address current problems or maintain safe and sound operations going

forward. The NCUA believes that this approach is consistent with the

legislative intent by insuring that only persons of demonstrated

expertise and importance to the institution will be allowed to serve

pursuant to a regulatory standards exemption.

Low- and Moderate-Income Areas

The current regulation permits interlocks under certain

circumstances involving a depository organization located ``in a low

income or other economically depressed area.'' However, the current

rule does not define ``low income'' or ``economically depressed.''

Section 209(c)(1)(A) of the Interlocks Act (12 U.S.C.

3207(c)(1)(A)) authorizes the NCUA to permit interlocks pursuant to the

Management Consignment exemption if the NCUA determines that the

proposed service would ``improve the provision of credit to low- and

moderate-income areas.'' The proposed regulation defines ``low- and

moderate-income areas'' as areas where the median family income is less

than 100 percent of the area median income. This definition is

consistent with Title I, Subtitle A of the CDRI Act (the Community

Development Banking and Financial Institutions Act of 1994) (12 U.S.C.

4701-4718), which, like the Management Consignment exemption affecting

institutions in low- and moderate-income areas, is intended to assist

the flow of credit into economically depressed areas. Section 103(17)

of the CDRI Act (12 U.S.C. 4702(17)) defines ``low income'' to mean not

more than 80 percent of the area median income. The NCUA believes that

Congress, by using the term ``low- and moderate-income'' in the

Management Consignment exemption, intended for that term to apply to an

area where the median family income exceeds 80 percent of the median

income for the area. The NCUA has selected 100 percent of the area

median income as the cutoff for defining ``low- and moderate-income

areas'' based on the belief that a higher threshold would permit

interlocks that would not improve the provision of credit to low- and

moderate-income areas.

Management Official

The current regulation defines ``management official'' to include

an employee or officer ``with management functions'' (including a

branch manager), a director, 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 proposed regulation adopts the definition of ``management

official'' set forth in the current rule, except that the phrase ``an

employee or officer with management functions'' is removed. It is

replaced by the term ``senior executive officer'' as defined by the

NCUA's regulation pertaining to the prior notice of changes in senior

executive officers, which implements 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).

The NCUA is proposing this change to eliminate the uncertainty and

attendant compliance burden created by the ambiguous term ``management

functions.'' The proposal incorporates specific illustrative examples

of positions at credit unions that will be treated as senior executive

officers. See 12 CFR 701.14. The NCUA believes that these definitions

will allow credit unions to identify impermissible interlocks with

greater certainty and thus will enhance compliance. The NCUA requests

comment on the advisability of defining ``management official'' by

using ``senior executive officer'' rather than ``employee or officer

with management functions.''

The current definition of ``management official'' exempts those

individuals whose management

[[Page 12045]]

functions relate to retail merchandising or manufacturing. Stated

another way, the current exemption applies to a category of persons

whose responsibilities are unrelated to the business of a deposit-

taking institution.

The NCUA specifically asks commenters to address whether the NCUA

should exempt a broader category of management officials whose duties

are unrelated to the provision of financial services by a depository

institution or depository holding company, and if so, how the NCUA

should define that category of excluded officials.

Relevant Metropolitan Statistical Area (RMSA)

The current regulation defines ``relevant metropolitan statistical

area'' as an MSA, a primary MSA, or a consolidated MSA that is not

comprised of designated primary MSAs as defined by the Office of

Management and Budget (OMB). This definition is derived from section

203(1) of the Interlocks Act (12 U.S.C. 3202(1)).

The proposed regulation defines ``relevant metropolitan statistical

area (RMSA)'' as an MSA, a primary MSA, or a consolidated MSA that is

not comprised of designated primary MSAs, to the extent that the OMB

defines and applies these terms. This change reflects the fact that the

OMB defines ``consolidated MSA'' to include two or more primary MSAs.

Given that consolidated MSAs, by the OMB's definition, are comprised of

primary MSAs, the reference to consolidated MSAs in the Interlocks Act

and the NCUA's regulation is inappropriate. The proposed change enables

the 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 current regulation defines ``representative or nominee'' as a

person who serves as a management official and has an express or

implied obligation to act on behalf of another person with respect to

management responsibilities. The current definition goes on to state

that the determination of whether someone is a representative or

nominee depends on the facts of a particular case and that certain

relationships (such as family, employment, and so on) may evidence an

express or implied obligation to act.

The proposed regulation also defines ``representative or nominee''

as someone who serves as a management official and has an obligation to

act on behalf of someone else. The proposed definition deletes the rest

of the current definition, however, and inserts in lieu thereof a

statement that the 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 act on behalf of another. The NCUA proposes this change to

clarify that the determination that a representative or nominee

situation exists will depend on whether there is a basis to conclude

that an agreement exists to act on someone's behalf. The NCUA notes

that the current definition provides specific guidance for determining

when a representative or nominee relationship might be found to exist,

and requests comment on whether the current definition, the proposed

definition, or another definition is preferable.

Prohibitions

The current regulation prohibits interlocks in the following three

instances. First, no two unaffiliated depository organizations may have

an interlock if they (or their depository institution affiliates) have

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 exceeding $20 million and the

depository organizations (or depository institution affiliates of

either) have offices in the same RMSA.\3\ 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.

\3\ A community as that term is defined in the proposal is

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

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The proposed regulation amends the rule as it applies to

institutions with assets of less than $20 million to better conform to

the purposes of the Interlocks Act. Whereas the current rule prohibits

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

$20 million or more, the proposed rule would apply the RMSA-wide

prohibition only if both organizations have total assets of $20 million

or more. Interlocks within a community involving unaffiliated

depository organizations would continue to be prohibited.

The NCUA believes that this proposed change is consistent with both

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

uses the plural ``depository institutions'' when referring to the

community-wide prohibition, in context, 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 less than $20 million is likely to derive most of its

business from the community in which it is located and unlikely to

compete with institutions that do not have offices in that community.

Therefore, interlocks involving one institution with assets under $20

million and another institution with assets of at least $20 million not

in the same community are not likely to lead to the anticompetitive

conduct that the Interlocks Act is designed to prohibit.

The NCUA believes, moreover, that the proposed 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.

The proposed regulation reflects the change affecting depository

organizations with less than $20 million in total assets. It also sets

forth the prohibition against interlocks involving large depository

organizations but does not change the substance of that prohibition.

The proposed regulation changes the wording of all three prohibitions

in order to make them easier to understand.

The NCUA invites comment on any aspect of this proposed section.

The NCUA specifically seeks comment on whether the proposed

reinterpretation of 12 U.S.C. 3202(1) might result in anticompetitive

effects and thus run counter to the legislative intent of the

Interlocks Act. For example, could the proposed change enable a large

depository organization to engage in anticompetitive conduct by

creating interlocks with one or more smaller depository institutions

located in the same RMSA but not in the same community (a ``hub and

spokes'' interlock)? The NCUA also seeks comment on whether the final

rule should specifically address such situations.

Interlocking Relationships Expressly Permitted by Statute

The current regulation restates most of the exemptions that are

expressly permitted by the Interlocks Act as well as listing those

exemptions that the NCUA has permitted by regulation pursuant to the

broad exemptive

[[Page 12046]]

authority that applied before the enactment of the CDRI Act. The

proposal deletes the exemptions authorized by NCUA's regulations and

states the exemptions found in 12 U.S.C. 3204(1)-(8). The proposed

regulation reorders the exemptions set forth in the current regulations

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

Interlocks Act.

Regulatory Standards Exemption

The current rule contains no regulatory standards exemption. The

proposed rule sets forth the standards that a credit union must satisfy

in order to obtain a regulatory standards exemption. The proposal

implements the requirement regarding certification by allowing a credit

union's board of directors (or the organizers of a credit union that is

being formed) to certify to the NCUA that it located no other qualified

candidates after undertaking reasonable efforts to locate other

qualified candidates who are not prohibited from service under the

Interlocks Act. If read narrowly, the Interlocks Act could require a

credit union 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,

the NCUA believes that the proposed ``reasonableness'' standard is

consistent with the legislative intent.

The proposed regulation also sets forth a presumption that the NCUA

will apply when reviewing an application for a regulatory standards

exemption. NCUA will presume that a person is critical to a credit

union's safe and sound operations if the NCUA also approves that

individual under section 914 of FIRREA and the credit union in question

either was a newly chartered institution, or was in a ``troubled

condition'' as defined in Sec. 701.14(b)(3) of NCUA's regulations at

the time the section 914 filing was approved.

The NCUA invites comment on the utility of the proposed presumption

and on whether other presumptions also should apply.\4\

\4\ The other banking agencies have proposed a presumption that

an interlock will not have an anticompetitive effect if it involves

institutions that, if merged, would not trigger a challenge from the

agencies on competitive grounds. The agencies will use the

Herfindahl-Hirschman Index (``HHI'') (See Department of Justice

Merger Guidelines (49 FR 26823, June 29, 2984)) to determine whether

the potential interlock has an anticompetitive effect since banks

and savings associations frequently use the HHI as an initial

indicator of the effects a transaction is likely to have on

competition in a given market. NCUA does not propose implementing

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 proposed regulation 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, the NCUA is not proposing a specific term for

a permitted exemption. Instead, the NCUA may require a credit union to

terminate the interlock if the 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. The 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

The current regulation restates the grandfather provisions set

forth in section 206 of the Interlocks Act (12 U.S.C. 3205). Section

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

interlock for an additional five years if the management official in

question satisfied the statutory criteria for obtaining an extension.

Individuals who wished to extend their dual service had until March 23,

1995, to apply to the NCUA. The proposed regulation removes the section

addressing the grandfather exemption because it is unnecessary and

redundant in light of the statute.

Management Consignment Exemption

The current regulation sets forth a number of instances in which

the NCUA may permit an exemption to the Interlocks Act. However, the

statutory provisions authorizing the NCUA to grant exemptions have been

amended, thereby requiring that the current regulation be amended as

well. The Management Consignment exemption set forth in section 209(c)

of the Interlocks Act (12 U.S.C. 3207(c)) is modeled after certain

exemptions that appear in the NCUA's current regulation.

The proposed regulation implements the Management Consignment

exemption, and restates the statutory criteria, with three

clarifications. First, the proposed rule states that the 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 a credit union is considered newly chartered (See 12

CFR 701.14(c)(1)).

Second, the proposal 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 noting the

types of exemptions 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 exemptions include those that

are ``owned by women or minorities.'' These exemptions ultimately were

codified in the Interlocks Act. Accordingly, the NCUA, along with the

other banking agencies have 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 proposal 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. The NCUA does not approve an

application for a credit union charter unless the applicant seeking a

charter can demonstrate that the proposed new credit union will operate

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

be an extraordinary instance where a newly chartered credit union

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 the

NCUA is to apply the Management Consignment exemption in cases

involving either

[[Page 12047]]

newly chartered institutions or institutions that are in an unsafe or

unsound condition. The Conference Report notes that the Federal banking

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 the agencies' 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, the NCUA proposes to permit exemptions pursuant

to the Management Consignment exemption if the management official will

strengthen either a newly chartered institution or an institution that

is in an unsafe or unsound condition. Commenters are requested to

address this approach.

The proposal sets forth two presumptions that the NCUA will apply

in connection with an application for an exemption under the Management

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

is capable of strengthening the management of a credit union that has

been chartered for less than two years if the NCUA approved the

individual to serve as a management official of that credit union

pursuant to section 914 of FIRREA. Second, the NCUA will presume that

an individual is capable of strengthening the management of a credit

union that is in an unsafe or unsound condition if the NCUA approved

the individual to serve under section 914 as a management official of

an institution at a time when that institution was in a ``troubled

condition.''

The 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 woman-owned institutions. No presumption regarding effects

on competition is proposed, given that this is not a factor to be

considered by the NCUA when reviewing an application for a Management

Consignment exemption.

The NCUA seeks comment on the utility of the proposed presumptions

and on whether additional presumptions should apply as well.

The proposed regulation 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 proposed regulation 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 and procedures that

apply to initial applications also apply to extension applications.

Change in Circumstances

The current regulation provides a 15-month grace period for

nongrandfathered interlocks that become impermissible due to a change

in circumstances. This period may be shortened by the NCUA under

appropriate circumstances. The proposed regulation revises the wording

of this section in the current regulations but not its substance. The

NCUA specifically seeks comment on the proposed continued availability

of a grace period.

Enforcement

The current regulations set forth the jurisdiction of the NCUA to

enforce the Interlocks Act. The proposed regulations simplify the

wording of this section in the current regulations but not its

substance.

Regulatory Procedures

Regulatory Flexibility Act

It is hereby certified that this proposal will not have a

significant economic impact on a substantial number of small entities.

Accordingly, a regulatory flexibility analysis is not required.

Paperwork Reduction Act

The Board has determined that the requirements of the Paperwork

Reduction Act do not apply.

Executive Order 12612

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

replace, will apply to all Federally insured credit unions. The NCUA

Board, pursuant to Executive Order 12612, has determined, however, that

this proposed 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 proposed rule will not

preempt provisions of State law or regulations.

List of Subjects in 12 CFR Part 711

Antitrust, Credit unions, Holding companies.

By the National Credit Union Administration Board on March 13,

1996.

Becky Baker,

Secretary of the Board.

For the reasons set out in the preamble, the NCUA proposes to

revise 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. 1766 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.), as amended, and the NCUA's general rulemaking

authority in 12 U.S.C. 1766.

(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 could have an anticompetitive effect.

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

insured credit unions and their affiliates.

[[Page 12048]]

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

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

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

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 common

ownership does not exist if the NCUA 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

NCUA considers, among other things, whether a person owns a nominal

percentage of the shares of one of the organizations and the percentage

is substantially disproportionate with 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 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) Credit union means a federal or state-chartered credit union

that is insured by the National Credit Union Share Insurance Fund.

(g) Critical means important in helping a depository organization

either address current problems or maintain safe and sound operations

going forward.

(h) 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.

(i) 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.

(j) Depository institution affiliate means a depository institution

that is an affiliate of a depository organization.

(k) Depository organization means a depository institution or a

depository holding company.

(l) Low- and moderate-income areas means areas where the median

family income is less than 100 percent of the area median income.

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

(i) A director;

(ii) An advisory or honorary director of an 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 above capacities.

(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

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

(iii) A person described in the provisos 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 of a depository institution

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

office of a foreign commercial bank, 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. The NCUA will find

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

if the first person has agreed to act on behalf of the second person

with respect to management responsibilities. The NCUA will determine,

after giving the affected person 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 as of the close of the organization's last

fiscal year.

(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

[[Page 12049]]

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 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 the NCUA.

(3) The NCUA 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. The 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 the 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) The 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

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

anticompetitive effect with respect to the depository organization.

(b) Presumptions. The NCUA applies the following presumption when

reviewing any application for a Regulatory Standards exemption: A

proposed management official is critical to the safe and sound

operations of a credit union if that official is approved by the NCUA

to serve as a director or senior executive officer of that credit union

pursuant to 12 CFR 701.14 or pursuant to conditions imposed on a newly

chartered credit union and the institution has operated for less than

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

12 CFR 701.14 at the time the service under 12 CFR 701.14 is approved.

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

section may continue until the NCUA notifies the affected organizations

otherwise. The NCUA may require a credit union to terminate any

interlock permitted under this section if the 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.

Sec. 711.6 Management Consignment exemption.

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

be prohibited by the Interlocks Act and Sec. 711.3 if the NCUA

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 woman-owned

depository organization;

(3) Strengthen the management of an 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 an institution that is in an

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

basis.

(b) Presumptions. The 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 the 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 has operated for less than two years

at the time the service under 12 CFR 701.14 is approved.

(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 the 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 12 CFR 701.14 is

approved.

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

may continue

[[Page 12050]]

for a period of two years from the date of approval. The 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 credit union involved in

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

circumstances. The NCUA may shorten this period under appropriate

circumstances.

Sec. 711.8 Enforcement.

The NCUA administers and enforces the Interlocks Act with respect

to credit unions, and their affiliates, and may refer any case of a

prohibited interlocking relationship involving these institutions to

the Attorney General of the United States to enforce compliance with

the Interlocks Act and this part.

[FR Doc. 96-6703 Filed 3-22-96; 8:45 am]

BILLING CODE 7535-01-U