Frequently Asked Questions about Regulation L and Subpart J of Regulation LL
Management Official Interlocks: The "Interlocks Rule"
Staff of the Board of Governors of the Federal Reserve System has developed the following frequently asked questions (FAQs) to assist entities in complying with the Depository Institution Management Interlocks Act (Interlocks Act) (12 U.S.C. §§ 3201 et seq.) and the Board's Interlocks Rule (12 CFR 212; 238.91-.99). Except as noted below, these FAQs are staff interpretations and have not been approved by the Board of Governors. Staff may supplement or revise these FAQs as necessary or appropriate in the future. Any questions regarding these FAQs, or requests for modification, rescission, or waiver, should be submitted through the Board's Contact Us form.
In General
12 CFR 212.2(a); 12 CFR 238.92(a) (Definition of "affiliate")
12 CFR 212.2(d); 12 CFR 238.92(d) (Definition of "contiguous or adjacent cities, towns, or villages")
12 CFR 212.2(f); 12 CFR 238.92(f) (Definition of "depository institution")
12 CFR 212.2(n); 12 CFR 238.92(n) (Definition of "representative or nominee")
12 CFR 212.4; 12 CFR 238.94 (Interlocking relationships permitted by statute)
In General
Q1: To which federal banking agency should a depository organization that seeks a regulatory exemption from the prohibitions of the Interlocks Act submit an exemption request?
A1: A depository organization (depository organization includes depository institutions and depository holding companies) that seeks a regulatory exemption from the prohibitions of the Interlocks Act need obtain only the approval of the appropriate federal depository institution regulatory agency (as defined in 12 U.S.C. § 3207) of the company seeking to add the management official. For example, when a person who serves as a management official of an existing bank seeks additionally to serve as a management official of a newly chartered bank, approval would be required only from the primary federal supervisor of the newly chartered bank. It is not necessary to submit an exemption request to the primary federal supervisor of the organization at which the proposed interlocking management official currently serves. Please note that this answer does not apply to the procedure set forth in 12 CFR 212.4(h) and 12 CFR 238.94(h), which is available where a director of a diversified savings and loan holding company seeks to serve as a director of an unaffiliated depository institution or depository holding company.
Source: FRRS 3-831; Letter from Robert deV. Frierson, Deputy Secretary of the Board, to H. Rodgin Cohen, Esq. (September 28, 2004), available here.
Posted: 3/31/2021
12 CFR 212.2(a); 12 CFR 238.92(a) (Definition of "affiliate")
Q1: When are depository organizations considered "affiliated" through common ownership and therefore not subject to the Interlocks Act?
A1: Generally, the Interlocks Rule defines "affiliate" to have the meaning given in section 202 of the Interlocks Act. 12 CFR 212.2(a), 238.92(a); see 12 U.S.C. § 3201(3). Under that definition, two companies will generally be affiliates if more than 25 percent of the voting stock of one company is beneficially owned in the aggregate by one or more persons who also beneficially own in the aggregate more than 25 percent of the voting stock of the other company. However, under the Interlocks Rule, an affiliate relationship between depository organizations does not exist if the Board 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.
The Board may deny affiliate status in situations where a person (together with members of his or her immediate family, as part of a control group over two organizations) (i) owns a nominal percentage of shares in one organization; and (ii) owns a substantially larger percentage of shares in the other organization. What constitutes a nominal percentage will vary from case to case. For example, a 2 percent holding in a large, widely held organization may not be nominal, whereas the same percentage may be nominal with respect to a small, closely held organization. For example, two organizations are affiliated if 13 stockholders each own 2 percent of the stock of each organization. Although each person may hold only a nominal number of shares, the disproportionality test has not been met. In another example, two organizations might not be affiliated if the common ownership group includes a person who holds a nominal 2 percent of the shares of one organization and 16 percent of the shares of the other organization.
Source: FRRS 3-813 (This interpretation in the Federal Reserve Regulatory Service (FRRS) reflects a prior version of the Interlocks Act that provided that two depository organizations are affiliates if the same person or group of persons beneficially own more than 50 percent of the voting shares of the two organizations. The Interlocks Act has since been amended to provide for a 25 percent threshold for determining affiliation. Accordingly, this interpretation has been revised to reflect the current threshold).
Posted: 3/31/2021
Q2: In cases where multiple depository organizations each have a controlling ownership interest in a joint venture, would the Interlocks Act prohibit an interlock between a parent depository organization investor and the subsidiary joint venture?
A2: No. The joint venture would be an affiliate of each parent depository organization. As the Interlocks Act was not intended to prohibit interlocks between affiliates, interlocks between the joint venture and its parent depository organization investors would not be prohibited by the Interlocks Act or the Interlocks Rule.
Posted: 3/31/2021
12 CFR 212.2(d); 12 CFR 238.92(d) (Definition of "contiguous or adjacent cities, towns, or villages")
Q1: Should water masses be considered when determining whether cities, towns, or villages are adjacent or within ten road miles of each other for purposes of the community prohibition in the Interlocks Act?
A1: Yes. For example, cities that do not share a border and are located on opposite banks of a river will not be considered adjacent if the road-mile distance between them via the nearest bridge is more than 10 miles.
Source: FRRS 3-812.
Posted: 3/31/2021
12 CFR 212.2(f); 12 CFR 238.92(f) (Definition of "depository institution")
Q1: Would a person's service as a management official of a foreign bank trigger an interlock for purposes of the Interlocks Act if the person also serves as a management official of an unaffiliated U.S. depository organization?
A1: A management official's service at a foreign bank and an unaffiliated U.S. depository organization would not trigger an interlock for purposes of the Interlocks Act if the management official's service at the foreign bank relates principally to the foreign bank's business outside the United States. The Interlocks Act would apply, however, to a management official's service at a U.S. branch of a foreign bank and an unaffiliated U.S. bank holding company.
Source: FRRS 3-814.
Posted: 3/31/2021
Q2: Are industrial banks or their parent companies subject to the restrictions of the Interlocks Act?
A2: Yes. The restrictions of the Interlocks Act apply to "depository organizations" (which include "depository institutions") and in specified circumstances to their "affiliates," which are defined terms in the Interlocks Rule. The definition of "depository institution" in the rule specifically includes industrial banks. Accordingly, a management official's service at an industrial bank and an unaffiliated depository institution or depository holding company is subject to the community, relevant metropolitan statistical area, and major assets prohibitions of the Interlocks Act and the Interlocks Rule.
Although the parent companies of industrial banks are not "depository organizations" under the Interlocks Act, they may be subject to the major assets prohibition of the Interlocks Act as affiliates of depository institutions. 12 U.S.C. § 3201(3). For example, if a management official of a bank holding company with total assets of $11 billion sought to serve as a management official of a parent of an industrial bank that has total assets of $15 billion, such service would be prohibited by the Interlocks Act and the Interlocks Rule based on the asset thresholds in the major assets prohibition and an exemption would be required.
Source: Letter from Robert deV. Frierson, Deputy Secretary of the Board, to Kristin H. Smith, Esq. (April 23, 2007), available here.
Posted: 3/31/2021
Q3: Is an interlock between a depository institution and a trust company subject to the prohibitions of the Interlocks Act and the Interlocks Rule?
A3: The prohibitions in the Interlocks Act apply to management officials of depository institutions or depository holding companies, and the statute defines depository institution to include, among other things, a trust company. 12 U.S.C. § 3201(1). Thus, generally, an interlock between a depository institution and a trust company would be subject to the prohibitions of the Interlocks Act and the Interlocks Rule. However, the Board previously has determined that trust companies that (i) do not have the power to accept deposits (other than in a fiduciary capacity) or to make personal or commercial loans and (ii) engage primarily in payments-, clearing-, and settlement-related activities are not depository institutions as contemplated by the Interlocks Act and the Interlocks Rule, and, therefore, are not subject to its prohibitions.
Source: Letter from Scott G. Alvarez, General Counsel of the Board, to Bradley K. Sabel, Esq. (April 3, 2009), available here; Order Approving a Notice to Engage in Certain Nonbanking Activities and Application to Become a Member of the Federal Reserve System, n. 12 (December 4, 1996), available here.
Posted: 3/31/2021
12 CFR 212.2(n); 12 CFR 238.92(n) (Definition of "representative or nominee")
Q1: Under what circumstances would the Board find that a person is a "representative or nominee" of another person for purposes of the Interlocks Act and the Interlocks Rule?
A1: For purposes of the Interlocks Rule, "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 Board 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. The Board will determine, after giving the affected persons an opportunity to respond, whether a person is a representative or nominee of another person. 12 CFR 212.2(n); 12 CFR 238.92(n).
In making such a determination, the Board may consider family, employment, or agency relationships between two persons as evidence of an express or implied obligation of one person to carry out management functions on the other person's behalf. Similarly, the ability of a person to elect a director and the exercise of that ability may be evidence of the elected official's express or implied obligation to the elector. However, neither a relationship nor the election of a director will in itself create an express or implied obligation. Whether or not such an obligation exists will be determined case by case, upon consideration of all relevant facts.
For example, if person A is a management official of a state member bank in town X and the spouse of person A, person B, becomes a management official at another state member bank in town X, the Board may question whether person B is the representative or nominee of person A. If the facts indicate that person B is not adequately qualified to be a management official and person A was instrumental in placing person B in the position, and if both person A and person B are given an opportunity to respond and fail to present facts or arguments to refute these findings, the Board may determine that person B is a representative or nominee of person A.
Situations that could warrant special scrutiny by the Board include those in which (i) a management official of a depository organization elects a director to the board of directors of another depository organization in the same community, or (ii) a major stockholder of two unaffiliated depository organizations in the same community elects directors to both organizations.
Source: FRRS 3-817.
Posted: 3/31/2021
12 CFR 212.4; 12 CFR 238.94 (Interlocking relationships permitted by statute)
Q1: What is the time limit on an exception for interlocking service by a management official of a depository organization that is in danger of closing?
A1: The Interlocks Act and the Interlocks Rule provide a five-year exception for interlocking service where a depository organization that is closed or is in danger of closing is acquired by another depository organization. 12 U.S.C. § 3204(7); 12 CFR 212.4(g), 238.94(g). This exception also applies to bridge banks created by the Federal Deposit Insurance Corporation to acquire and assume the deposits and liabilities of a failed bank. However, under the general exemption provisions of the Interlocks Rule, the Board may permit indefinitely an interlock that otherwise would be prohibited by the Interlocks Act if the Board determines that the interlock would not result in a monopoly or in a substantial lessening of competition and would not present safety and soundness concerns. 12 CFR 212.6(a), 238.96(a). The Interlocks Rule also provides that, in reviewing a request for an exemption, the Board will apply a rebuttable presumption that an interlock will not result in a monopoly or in a substantial lessening of competition if the depository organization seeking to add the management official is deemed to be in troubled condition (as defined in 12 CFR 225.71). 12 CFR 212.6(b)(4), 239.96(b)(4).
Source: Letter from Michael Bradfield, General Counsel of the Board, to Baldwin B. Tuttle, Esq. (January 17, 1989), available here.
Posted: 3/31/2021
Q2: Are all management officials of a diversified savings and loan holding company subject to the prohibitions in the Interlocks Act and the Interlocks Rule?
A2: All management officials of a savings and loan holding company (including a diversified savings and loan holding company) are generally subject to the prohibitions of the Interlocks Act; however, the Interlocks Act provides that a director of a diversified savings and loan holding company may serve as 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 institution regulatory agencies at least 60 days before the dual service is proposed to begin; and (ii) with respect to each notification, the appropriate regulatory agency does not disapprove the dual service before the end of the 60-day period. This exception is not available to nondirector management officials (for example, senior executive officers). A management official of a diversified savings and loan holding company also may apply for a regulatory exemption.
Source: 12 U.S.C. § 3204(8); Letter from J. Virgil Mattingly, General Counsel of the Board, to John Franco (April 14, 1989), available here.
Posted: 3/31/2021