Mr. TRAUTZ. Your point is well taken, Senator. But I believe that if a man does serve his full term, even though he may, as you say, manipulate things while he is in office to his advantage or to the advantage of the institution he might go with, if he has served his full term, in our opinion he has done his job and he should be allowed to go out and employ his expertise. The CHAIRMAN. He certainly ought to be able to get employment. We don't want to take any action that would keep people from getting reasonable employment. But he has a whole spectrum of the private sector where he can work, and not to work in the industry he has regulated it would seem to me is not necessarily a great sacrifice. What we try to do-maybe we can work something out. What we try to do with procurement officials is to provide, if, for example, the Defense Department has somebody who works for Boeing, they want him very much in the Defense Department because he is very good in a particular area, so he comes in and disqualifies himself from working on any Boeing contract at all. Then he is free to go back to Boeing, not having worked on their contract or influenced what was done, and everything is taken care of. He can continue his career with the firm he started with, and there is no conflict of interest. Perhaps we could work out that same kind of situation with the regulators. He could disqualify himself from anything dealing with his particular institution and then be free to go back to that institution, not having made any decisions that benefited it. Mr. TRAUTZ. That would be most acceptable. The CHAIRMAN. Mr. Tucker, in your testimony you expressed the same concerns that a number of Illinois bankers have raised concerning the definition of affiliates in interlocking legislation. Would you support an amendment to S. 73 which would allow holdings of less than 5 percent to be considered in determining whether an institution is affiliated, but to allow the Federal Reserve Board to cover by regulation situations where stock is interchanged to avoid the purposes of the act? Mr. TUCKER. Yes. I believe the Federal Deposit Insurance Corporation has proposed legislation that would really require the supervisory authorities to consider all of the facts and make a determination. I would think that would satisfy us, certainly. Very frequently Senator, affiliation is something much more than just stock ownership. It can be far more subtle, for example. I would think if you left the matter to the bank regulatory authorities, they could inquire as to all of the facts, get all of the facts, and in light of all of the facts, make a determination as to whether or not affiliation existed. And certainly an amendment to that particular effect would be satisfactory from our standpoint. The CHAIRMAN. Gentlemen, I want to thank all of you for excellent testimony, and for making a fine record. We very much appreciate it. The committee will stand adjourned. [Thereupon, at 12:25 p.m. the hearing was adjourned.] [The following additional material was received for the record:] The Conference of State Bank Supervisors is pleased to submit comments regarding the above two bills because of their importance as substantive issues and because of their implications for state bank regulatory authorities. As the Conference pointed out in its letter of April 8, 1976 regarding S. 2304, the predecessor bill of S. 71, CSBS endorses the general objectives of this bill. Improper insider transactions should be curtailed. Abusive self-dealing has been a significant contributing factor in more than half of the bank failures since 1960. The Comptroller of the Currency and the FDIC have within the past two years adopted regulations designed to curb insider violations, and state banking departments operate under statutes, regulations and/or policies enacted for the purpose of preventing improper practices in this area. The Conference considers it entirely proper that the Comptroller of the Currency, as the primary regulator of national banks, should promulgate insider regulations for banks under the direct supervision of that office. Consistent with this position, CSBS believes that state banking departments, as the primary regulatory source for state-chartered banks, should exercise primary responsibilities relative to designing 1015 EIGHTEENTH STREET, N.W. WASHINGTON, D.C. 20036 (202) 296-2840 measures to combat violations of insider transactions and to enforcing such measures as they affect banks which they charter. The Conference notes the absence of any provisions in S. 71 recognizing the primary role of states in protecting the safety and soundness of banks that are chartered under state law. Absent a clear showing that states have been doing an inadequate job of supervising and containing abusive insider transactions, CSBS must regard S. 71 as posing an unnecessary centralization of regulatory authority in this area. As the Conference has consistently pointed out, if federal regulation pursues an inexorable trend towards duplication of state regulation, or a disregard of state efforts to regulate banks under their primary supervision, inevitably there will be a weakening of the dual banking system as state bankers question the value of their state-chartered status burdened with duplicatory federal-state oversight. In its letter to you dated April 8, 1976 regarding S. 2304, CSBS expressed its concern that the bill lacked language that would provide for administrative and/or judicial review for those parties against whom certain civil penalties would be levied for violations of provisions of S. 2304. The Conference notes that S. 71 has made substantial improvement in this regard. Amendment #196 being offered by you will further improve the bill as proposed by providing that a director, officer or other person concerned would have the opportunity for a hearing resulting from any removal action taken against such person by the appropriate federal banking agency. With respect to S. 73 which would prohibit certain interlocking management and director relationships among depository institutions, the Conference again notes the absence of exemptive provisions for states in which statutes, regulations and/or policies are already in place to prevent improper interlocks involving state-chartered financial institutions. While states do not have the primary responsibility for the implementation of federal antitrust laws, states are vitally concerned with anticompetitive practices and intercorporate relationships that may affect the ability of the public to receive financial services at reasonable terms and consistent with sound banking practices. State laws and judicial decisions provide a framework of fiduciary relationships covering many aspects of dealings between financial institutions and others. It is believed that in the main state laws, regulations and policies designed to deal with situations unique to given local geographic, financial or philosophical situations are more responsive to local needs than can be sweeping measures enacted at a federal level which require local units to comply with a uniform pattern of action. In this connection, it is noted that the Federal Reserve Board pointed out in its letter of September 28, 1976, forwarding instant proposal to the Senate Banking Committee, that Section 8 of the Clayton Act exempts interlocks between banks under "common control." Thus, the interlock prohibitions do not apply to a holding company and its subsidiaries or to two subsidiaries of the same holding company. In addition, the interlock exemptions apply whenever the same persons own 50 percent of the stock of two institutions. S. 73, in continuing the "common control" or affiliation exemption, would eliminate therefrom shareholders of less than 5 percent of a bank's stock from the computation of the 50 percent common control or ownership provisions. The Fed explained that its reason for proposing such action is that the provisions of the Clayton Act's interlock prohibitions can now be evaded by the exchange of a few shares of stock between two persons where one owns more than 50 percent of the shares of one depository institution and the other owns more than 50 percent of the shares of another depository institution. Deceitful practices of the type mentioned above cannot be condoned. However, there are a number of chain banking groups operating under de facto common ownership in which there is wide distribution of bank stock, with many persons owning less than 5 percent of the stock. These groups, operating for many years, particularly in Illinois, have been able to pool their manage ment talents and to provide customer services which would not have been possible otherwise. S. 73 would work undue hardships on such chain banking undertakings despite the fact that the wide distribution of bank stock in these situations is consistent with respective state statutes and with the spirit of antitrust statutes designed to prevent anticompetitive practices. In view of the foregoing, CSBS recommends that the 5 percent exclusionary feature be stricken from the proposal. The Conference recommends that the determination as to whether "affiliation" or proper relationships exist in such situations should be determined on a factual basis by the primary regulatory source, i.e. the Comptroller of the Currency for national banks and respective state bank supervisors for state-chartered banks. In situations involving both national and state-chartered banks, the office of the Comptroller of the Currency and state banking departments have demonstrated their capabilities to work together to correct improper actions. In conclusion, it is believed that Congress in considering such proposals as S. 71 and S. 73 should take into consideration measures in existence in various states which parallel the objectives being sought at the federal level, and provide exemptions for those states with formal standards similar to those being proposed, or which effectively have curtailed subject problems at the state level by whatever means. Sincerely, Lawrence & Kreider Lawrence E. Kreider Executive Vice President- LEK: drj |