[Federal Register Volume 77, Number 59 (Tuesday, March 27, 2012)]
[Proposed Rules]
[Pages 18127-18135]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-7051]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 380
RIN 3064-AD94
Enforcement of Subsidiary and Affiliate Contracts by the FDIC as
Receiver of a Covered Financial Company
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The FDIC is proposing a rule (``Proposed Rule''), with request
for comments, that implements section 210(c)(16) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the ``Dodd-Frank Act'' or
the ``Act''), codified at 12 U.S.C. section 5390(c)(16), which permits
the Corporation, as receiver for a financial company whose failure
would pose a significant risk to the financial stability of the United
States (a ``covered financial company''), to enforce contracts of
subsidiaries or affiliates of the covered financial company despite
contract clauses that purport to terminate, accelerate, or provide for
other remedies based on the insolvency, financial condition or
receivership of the covered financial company. As a condition to
maintaining these subsidiary contracts in full force and effect, the
Corporation as receiver must either: transfer any supporting
obligations of the covered financial company that back the obligations
of the subsidiary or affiliate under the contract (along with all
assets and liabilities that
[[Page 18128]]
relate to those supporting obligations) to a bridge financial company
or qualified third-party transferee by the statutory one-business-day
deadline; or provide adequate protection to such contract
counterparties. The Proposed Rule sets forth the scope and effect of
the authority granted under section 210(c)(16), clarifies the
conditions and requirements applicable to the receiver, addresses
requirements for notice to certain affected counterparties, and defines
key terms.
DATES: Written comments on the Rule must be received by the FDIC no
later than May 29, 2012.
ADDRESSES: You may submit comments by any of the following methods:
Agency Web Site: http://www.fdic.gov/regulations/laws/federal. Follow instructions for Submitting comments on the Agency Web
Site.
Email: [email protected]. Include ``RIN 3064-AD94'' in the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW.,
Washington, DC 20429
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m. (EST).
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Public Inspection: All comments received will be posted without
change to http://www.fdic.gov/regulations/laws/federal including any
personal information provided. Comments may be inspected and
photocopied in the FDIC Public Information Center, 3501 North Fairfax
Drive, Room E-I002, Arlington, VA 22226, between 9 a.m. and 5 p.m.
(EST) on business days. Paper copies of public comments may be ordered
from the Public Information Center by telephone at (877) 275-3342 or
(703) 562-2200.
FOR FURTHER INFORMATON CONTACT: R. Penfield Starke, Assistant General
Counsel, Legal Division (703) 562-2422; Elizabeth Falloon, Counsel,
Legal Division (703) 562-6148; John W. Popeo, Senior Attorney, Legal
Division (972-761-8171); Charlton R. Templeton, Resolution Planning and
Implementation Specialist, Office of Complex Financial Institutions
(202-898-6774).
SUPPLEMENTARY INFORMATION: Title II of the Dodd-Frank Act provides for
the appointment of the FDIC as receiver of a covered financial company
that poses a systemic risk to the nation's economic stability and
outlines the process for the orderly resolution of a covered financial
company following the FDIC's appointment as receiver. Section 209,
codified at 12 U.S.C. section 5389, authorizes the FDIC, in
consultation with the Financial Stability Oversight Council, to
prescribe rules and regulations as the FDIC considers necessary or
appropriate with respect to the rights, interests, and priorities of
creditors, counterparties, security entitlement holders, or other
persons with respect to any covered financial company and other matters
necessary or appropriate to the implementation of the orderly
liquidation authority established under Title II of the Act. Pursuant
to the authority granted by section 209, the FDIC is issuing the
Proposed Rule, with request for comments.
I. Background
Fundamental to the orderly liquidation of a covered financial
company is the ability to continue key operations, transactions and
services that will maximize the value of the firm's assets and
operations and avoid a disorderly collapse in the marketplace. To
facilitate this continuity of operations, the Dodd-Frank Act provides
several tools to preserve the value of the covered financial company's
assets and business lines, including the powers granted in section
210(c)(16), codified at 12 U.S.C. 5390(c)(16). Specifically, section
210(c)(16) provides that:
The Corporation, as receiver for a covered financial company or
as receiver for a subsidiary of a covered financial company
(including an insured depository institution) shall have the power
to enforce contracts of subsidiaries or affiliates of a covered
financial company, the obligations under which are guaranteed or
otherwise supported by or linked to the covered financial company,
notwithstanding any contractual right to cause the termination,
liquidation, or acceleration of such contracts based solely on the
insolvency, financial condition or receivership of the covered
financial company if--
(i) such guaranty or other support and all related assets and
liabilities are transferred to and assumed by a bridge financial
company or a third party (other than a third party for which a
conservator, receiver, trustee in bankruptcy or other legal
custodian has been appointed, or which is otherwise the subject of a
bankruptcy or insolvency proceeding) * * * [by 5 p.m. (eastern time)
on the business day following the date of appointment]; or
(ii) the Corporation, as receiver, otherwise provides adequate
protection with respect to those obligations.
The conditions contained in (i) and (ii) of the quoted statute were
included to assure counterparties that any contractual right to
guarantees or other support, including claims on collateral or other
related assets, would be protected. Thus, section 210(c)(16) requires,
as a condition to the authority to enforce subsidiary or affiliate
contracts that are ``linked to'' the financial condition of the covered
financial corporation through a default provision, that the Corporation
as receiver transfer any guaranty or other support provided by the
specified covered financial company for the contractual obligations
together with all related collateral to a bridge financial company or
other qualified transferee within one business day after its
appointment as receiver. In the alternative, if the receiver does not
transfer the support and the related assets and liabilities, the
receiver must provide ``adequate protection'' with respect to any
support or collateral not transferred in order to preserve its right to
enforce the contract of the subsidiary or affiliate.
In providing for the orderly liquidation authority of Title II,
Congress recognized the structural complexity of large financial
companies that might pose a threat to the financial stability of the
nation. Accordingly, the Dodd-Frank Act provides certain particular
authorities with respect to subsidiaries and affiliates of the covered
financial company. For instance, section 210(a)(1)(E) of the Dodd-Frank
Act provides an expedited procedure to allow the Corporation to appoint
itself as the receiver of certain subsidiaries of a covered financial
company if the Corporation and the Secretary of the Treasury jointly
determine that such subsidiary is in default or in danger of default
and that such action would mitigate serious adverse effects on the
financial stability of the United States and would facilitate the
orderly liquidation of the covered financial company. That section
further provides that upon such an appointment, the subsidiary would be
treated as a covered financial company, and the Corporation would be
able to exercise the full range of special powers available to the
receiver.
In certain cases, however, the receiver for the covered financial
company may find that the best course of action to maximize the value
of the covered financial company and to mitigate systemic risk would be
to avoid actions that place subsidiaries in danger of default or that
necessitate complex interlocking receiverships. The affiliated legal
entities that collectively comprise a complex financial institution
typically share and provide intra-group funding, guarantees,
administrative support,
[[Page 18129]]
human resources and other operational and business functions. Some of
these operations and activities may be critical to the day-to-day
functions and overall operations of the group. In addition, certain
significant subsidiaries of a covered financial company may be
essential to core business lines or conduct critical operations that,
if discontinued, may threaten the stability of the financial markets.
In these circumstances, orderly liquidation of a covered financial
company may best be accomplished by establishing a single receivership
of the parent holding company and transferring valuable operations and
assets to a solvent bridge financial company, including the stock or
other equity interests of the company's various subsidiaries.
Accordingly, the Dodd-Frank Act provides the FDIC with the tools and
flexibility to act effectively as receiver for the covered financial
company at the holding company or parent level without placing solvent
subsidiaries into receivership. This approach may be the best means of
preserving value, minimizing the shock to the financial system,
providing additional flexibility to mitigate cross-border resolution
issues for global systemically-important financial companies, and
allowing for a more expeditious resolution of a covered financial
company.
Where such an approach is adopted, the powers granted to the
receiver under section 210(c)(16) are essential to preservation of
going-concern value of the subsidiaries for the benefit of the parent
in receivership. Absent this statutory provision, counterparties to
contracts of subsidiaries and affiliates could exercise contractual
rights to terminate their agreements based upon the insolvency of the
specified covered financial company. As a result, otherwise viable
affiliates of the covered financial company could become insolvent,
thereby inciting the collapse of interrelated companies and potentially
amplifying ripple effects throughout the economy.
As described in more detail below, this Proposed Rule would clarify
the scope of the authority granted in section 210(c)(16) as well as
conditions and requirements applicable to the receiver. The Proposed
Rule makes clear that the effect of this enforcement authority is that
no party may exercise any remedy under a contract simply as a result of
the appointment of the receiver and the exercise of its orderly
liquidation authorities as long as the receiver complies with the
statutory requirements. The Proposed Rule would address requirements
for notice to affected counterparties and defines key terms. It also
would clarify the term ``adequate protection'' in a manner consistent
with its interpretation under the Bankruptcy Code.
II. Proposed Rule
Overview
The Proposed Rule would clarify that the power of the Corporation
as receiver to enforce contracts of subsidiaries and affiliates under
Dodd-Frank Act section 210(c)(16) effectively preserves contractual
relationships of subsidiaries and affiliates of the covered financial
company during the orderly liquidation process. The Proposed Rule would
identify certain contracts that are ``linked to'' the covered financial
company within the meaning of the statute, as well as contracts that
also are ``supported by'' the covered financial company. Under the
statute, a contract is ``linked to'' a covered financial company if it
contains a provision that provides a contractual right to ``cause the
termination, liquidation or acceleration of such contract based solely
on the insolvency, financial condition, or receivership of the covered
financial company.'' That type of provision, called a ``specified
financial condition clause'' in the Proposed Rule, is more fully
defined in the Proposed Rule. Although the statute speaks in terms of
the power to enforce a contract to which the receiver is not a party,
the Proposed Rule would recognize the practical effect of the intent of
this authority, which is that the counterparty to such a contract may
not exercise remedies in connection with a specified financial
condition clause if the statutory conditions are met. No action is
required of the receiver to enforce a linked contract; the Proposed
Rule would make clear that the contract would remain in full force and
effect unless the receiver failed to meet the requirements with respect
to any supporting obligations of the covered financial company.
The Proposed Rule would establish that if the subsidiaries'
obligations under the linked contract are supported by the covered
financial company through, for example, guarantees or the granting of
collateral that supports the obligations, the Corporation as receiver
must either (a) transfer such support (along with all related assets
and liabilities) to a qualified transferee not later than 5 p.m.
(eastern time) on the business day following the appointment of the
receiver, or (b) provide ``adequate protection'' to contract
counterparties following notice given to the counterparties in
accordance with the guidelines set forth in the Proposed Rule by the
one-business-day deadline.
The Proposed Rule also would clarify the meaning of the statutory
provision regarding a contractual obligation that is ``guaranteed or
otherwise supported by'' the covered financial company. Support
includes guarantees that may or may not be collateralized, netting
arrangements and other examples of financial support of the obligations
of the subsidiary or affiliate under the contract. In circumstances
where a contract of a subsidiary or affiliate is linked to the
financial condition of the parent company via a ``specified financial
condition clause,'' but where the obligations of the subsidiary or
affiliate are not ``supported by'' the covered financial company
through guarantees or similar supporting obligations, the requirement
to transfer support and related assets or provide adequate protection
does not apply. The mere existence of a ``specified financial condition
clause'' does not constitute a ``support'' obligation by the covered
financial company, and the Proposed Rule would make it clear that the
subsidiary contract remains enforceable without any requirement to
effectively create new support where none originally existed. This is
consistent with the effect of sections 210(c)(13), providing that ipso
facto clauses in contracts of the covered financial company are
unenforceable, and 210(c)(8) of the Dodd-Frank Act, providing that
``walkaway clauses'' in qualified financial contracts of the covered
financial company are unenforceable. In the case of those types of
contractual provisions, there is no specified entity required to
provide support, hence the concept of alternate support or adequate
protection is inapplicable. In the same way, under the Proposed Rule,
the concept of adequate protection does not arise in the absence of
supporting obligations by the specified entity.
The Proposed Rule similarly applies broadly to all contracts, and
not solely to qualified financial contracts. For example, a real estate
lease or a credit agreement, neither of which would typically be
classified as a qualified financial contract, would be subject to
enforcement under section 210(c)(16) and the Proposed Rule
notwithstanding a specified financial condition clause that might, for
instance, give a lessor the right to terminate a lease based upon a
change in financial condition of the parent of the lessee. A swap
agreement of a subsidiary or affiliate would be subject to section
210(c)(16) and the Proposed Rule in the same manner if the
[[Page 18130]]
agreement contains specified financial condition clause.
The Proposed Rule would not affect other provisions of the Dodd-
Frank Act governing qualified financial contracts, such as sections
210(c)(8) (``Certain Qualified Financial Contracts'') and 210(c)(9)
(``Transfer of Qualified Financial Contracts''). For example, where a
covered financial company's support of a subsidiary or affiliate
obligation would itself be considered a qualified financial contract,
such as a securities contract, the provisions of section 210(c)(9) that
prohibit the selective transfer of qualified financial contracts with a
common counterparty (or a group of affiliated counterparties) would
continue to apply. Likewise, the provisions in section 210(c)(10) of
the Dodd-Frank Act applicable to counterparties of qualified financial
contracts also would continue to apply. On the other hand, if the
covered financial company's support of a subsidiary or affiliate
consists of multiple contracts that are not qualified financial
contracts, the Corporation as receiver may transfer all or a portion of
such group of contracts as long as it provides adequate protection for
the supporting obligations that were not transferred. Similarly, the
Corporation may transfer all or a portion of ``related assets and
liabilities'' that are not qualified financial contracts if it provides
adequate protection for the portion of the assets and liabilities that
was retained by the Corporation as receiver.
Section-by-Section Analysis
Paragraph (a) of the Proposed Rule would state the general rule
with respect to the authority granted under section 210(c)(16) of the
Dodd-Frank Act, i.e., that the contracts of a subsidiary or affiliate
of a covered financial company are enforceable notwithstanding the
existence of a ``specified financial condition clause'' that provides a
counterparty with the right to terminate or exercise remedies based
upon the financial condition of the parent or affiliate covered
financial company, provided that the FDIC as receiver for the covered
financial company transfers all support and related assets and
liabilities that back the obligations of such subsidiary or affiliate.
To the extent that the receiver fails to transfer all support and
related assets and liabilities, it must provide adequate protection to
such counterparty to preserve its right to enforce the contracts of the
subsidiary. The effect of this ability to enforce the contract is
intended to be broad enough to preclude the counterparties from
terminating or exercising other remedies such as requiring additional
collateral but is intended to be limited in scope solely to remedies
arising out of a specified financial condition clause not other
contractual defaults by the subsidiary or affiliate. The ability either
to transfer support or to provide adequate protection can be exercised
in the alternative, or in combination. For example, if some, but not
all collateral is transferred, appropriate adequate protection may be
provided in lieu of the collateral not transferred.
The deadline for the transfer of support is the same as the time
limit applicable to the transfer of qualified financial contracts under
section 210(c)(10) of the Dodd-Frank Act, i.e., by 5 p.m. (eastern
time) on the next business day. Although the decision to provide
adequate protection in lieu of transferring support must also be made
and steps must be taken that are reasonably calculated to provide
notice within a business day, the language of the Proposed Rule does
not require that the adequate protection be fully in place by that
next-day deadline. Although the failure to complete within a business
day the documentation or transactions necessary should not be deemed to
be a waiver of the right to enforce the contract, once the receiver has
provided notice of its intent to transfer support or provide adequate
protection, the counterparty would be entitled to the benefit of the
adequate protection even before the documentation or transfer of
collateral were fully completed, if necessary.
The Proposed Rule would provide that a qualified transferee such as
a bridge financial company or solvent third-party acquirer, as well as
the Corporation as receiver, would have the authority to enforce linked
contracts under the section 210(c)(16) of the Dodd-Frank Act. This is
consistent with the intent of the statute that subsidiary and affiliate
contracts should remain in effect and enforceable through the entire
orderly resolution process. Also, the subsidiary or affiliate continues
to have the ability to enforce the terms of such contract as well. In
essence, the effect of such authority to enforce is substantively the
same as a prohibition of the counterparty to assert a specified
financial condition clause against the subsidiary or affiliate.
Effectively, the Proposed Rule would make clear that the practical
effect of the operation of section 210(c)(16) is similar to that of
section 210(c)(13) (prohibiting counterparties from the exercise of
certain rights arising out of ipso facto clauses) and section 210(c)(8)
(prohibiting counterparties to qualified financial contracts from the
exercise of certain rights arising out of walkaway clauses); i.e., that
the counterparties are prohibited from exercising remedies under a
specified financial condition clause if the statutory conditions are
met.
The statute expressly states that the power to enforce contracts of
a subsidiary in the circumstances described in section 210(c)(16) is
vested in ``[t]he Corporation, as receiver for a covered financial
company or as receiver for a subsidiary of a covered financial company
(including an insured depository institution).'' This is captured in
subparagraph (a)(3) of the Proposed Rule. This recognizes that the
preservation of value through the enforcement of subsidiary and
affiliate contracts is important to all of the interconnected entities
that are related to the entity in receivership. The effect of the
statute is to prohibit the counterparty from terminating or exercising
remedies based solely on the condition of the covered financial
company. Once the essential link to the covered financial company is
established via the specified financial condition clause, all of the
subsidiaries of the covered financial company as well as the bridge
financial company or qualified transferee share the benefit of the
authority to enforce.
Definitions
The Proposed Rule would include eight definitions: ``linked,''
``specified financial condition clause,'' ``support,'' ``related assets
and liabilities,'' ``qualified transferee,'' ``subsidiary,''
``affiliate,'' and ``control.''
A contract is ``linked'' to a covered financial company if it
contains a specified financial condition clause naming the covered
financial company as the specified company.
The term ``specified financial condition clause'' is intended to
broadly capture any provision that gives any counterparty a right to
terminate, accelerate or exercise default rights or remedies as a
result of any action or circumstance that results in or arises out of
the exercise of the orderly liquidation authority. Each aspect of the
definition of the term ``specified financial condition clause'' should
be read expansively to effectuate the statutory intent that
counterparties are effectively stayed from exercising rights under such
a clause to terminate contracts or exercise other remedies during a
Title II resolution process if the requirements of the statute are met.
Thus, a specified financial condition clause includes any clause that
might be interpreted as giving rise to a termination right or
[[Page 18131]]
other remedy due to the insolvency of the specified covered financial
company that might have precipitated the appointment of the receiver,
such as an act of insolvency or a downgrade in a rating from a rating
agency. Likewise, the definition is broad enough to include a change in
control provision that creates termination rights or other remedies
upon the appointment of the FDIC as receiver or other change in
control, such as the transfer of stock in the subsidiary to the bridge
financial company or the sale, conversion or merger of the bridge
financial company or its assets. The intent is to allow the subsidiary
or affiliate contract to remain in effect despite the exercise of any
or all of the authorities granted to the FDIC as receiver for a covered
financial company throughout the orderly liquidation process.
Although the language of the statute refers to the counterparty's
rights as ``termination, liquidation or acceleration,'' that list of
remedies is not intended to be exclusive as the overall intent of the
statute is to provide the FDIC with the power it needs to preserve
going-concern value of the covered financial company as long as the
rights of counterparties to receive bargained-for support is respected.
Accordingly, the Proposed Rule uses the broader phrase ``terminate,
liquidate, accelerate or declare a default under'' the contract. In
effect, the specified financial condition clause is unenforceable if
the statutory requirements are met. In addition, by clarifying that the
link created by the specified financial condition clause may operate
``directly or indirectly,'' the Proposed Rule clarifies that the scope
of the defined term includes contracts where the specified company
under the clause may be another company or an affiliate in the
corporate structure so long as the ultimate triggering event relates to
the financial condition of the covered financial company or the Title
II actions take with respect to that covered financial company. The
term ``specified company'' used in the definition is consistent with
terminology commonly used in such provisions in derivatives contracts
to refer to the company whose financial condition is the basis for the
termination right or other remedy.
Language in this definition is borrowed from sections of the Dodd-
Frank Act addressing related matters, such as the enforceability of
contracts of the covered financial company notwithstanding ipso facto
clauses (section 210(c)(13)) and walkaway clauses with respect to
qualified financial contracts (section 210(c)(8)(F)). The fact that
this language is adapted and expanded upon should not be deemed to
reflect any interpretation of the meaning or possible limitations of
those sections. The broad language of this definition reflects the
intent that it be read to accomplish the purpose of section 210(c)(16)
to ensure that the receiver has the power to avoid precipitous
terminations by counterparties of the subsidiary resulting in
disorderly collapse and a loss of value to the covered financial
company.
In the event a counterparty (including its affiliates) has more
than one contract with the subsidiary or affiliate of the covered
financial company, any contract with a cross-default provision with
respect to another contract containing a specified financial condition
clause also would be ``linked.''
The term ``support'' means to guarantee, indemnify, undertake to
make any loan, advance or capital contribution, maintain the net worth
of the subsidiary or affiliate, or provide other financial assistance.
The proposed definition does not include other assistance that is not
financial in nature, such as an undertaking to conduct specific
performance. Generally, if the obligation of the counterparty to
perform is linked to the financial condition of the parent, the support
also would likely be financial, and other types of arrangements are
beyond the scope of what was intended by the statute. We are requesting
comments with respect to whether this definition is sufficiently
comprehensive in the Notice of Proposed Rulemaking.
The term ``related assets and liabilities'' includes assets of the
covered financial company serving as collateral securing the covered
financial company's support obligation, and setoff rights or netting
arrangements to which the covered financial company is subject if they
are related to the covered financial company's support. It should be
noted, however, that if the ``support'' were in the nature of a non-
recourse guarantee, or an unsecured limited recourse guarantee, the
related assets and liabilities would not consist of all of the assets
of the covered financial company. The transfer of an unsecured
guarantee or obligation to a qualified transferee would meet the
requirements of the Proposed Rule in this regard, without the transfer
of any particular assets. The definition also broadly includes any
liabilities of the covered financial company that directly arise out of
or relate to its support of the obligations or liabilities of the
subsidiary or affiliate. In some instances, this definition may be
redundant with the definition of support, as a guaranty could be both a
related liability or a supporting obligation. The broader definition is
intended to make clear that the full range of supporting obligations
and related assets and liabilities must be transferred to ensure that
the counterparties are in substantially the same position as they were
prior to the transfer to the qualified transferee.
It is important to note that in some situations ``support'' and
``related assets and liabilities'' are themselves qualified financial
contracts. Section 210(c)(8)(D)(ii)(XII) of the Act includes
``securities contracts'' as qualified financial contracts, and defines
securities contracts to include ``any security agreement or arrangement
or other credit enhancement related to any agreement or transaction
referred to in this clause, including any guarantee or reimbursement
obligation in connection with any agreement or transaction referred to
in this clause.'' To the extent such support and related assets and
liabilities are securities contracts or other forms of qualified
financial contracts, they are subject to the rules applicable to the
treatment of qualified financial contracts, including the so-called
all-or-none rule under section 210(c)(9).
The term ``qualified transferee'' specifically includes a bridge
financial company as well as any other unrelated third parties that
assume the support of the covered financial company (and all related
assets and liabilities). A qualified transferee can include both the
bridge financial company and a subsequent transferee; for instance, if
assets and liabilities, including the support and related assets and
liabilities are transferred first to a bridge financial company and
then to another acquirer either prior to or upon the termination of the
bridge financial company pursuant to the orderly liquidation
authorities granted under Title II of the Dodd-Frank Act.
The definition of the terms ``subsidiary'' and ``affiliate'' are
consistent with the definitions given to such terms in the Dodd-Frank
Act. Section 2(18) of the Act, codified at 12 U.S.C. 5301(18), provides
that these terms will have the same meanings as in section 3 of the FDI
Act (12 U.S.C. 1813). Under the FDI Act, the term ``subsidiary'' is
broadly defined as ``any company which is owned or controlled directly
or indirectly by another company * * *.'' ``Affiliate is defined by
reference to the Bank Holding Company Act, 12 U.S.C. 1841(k) as ``any
company that controls, is controlled by,
[[Page 18132]]
or is under common control with another company.''
The statute refers to the definition of ``control'' provided in the
FDI Act, which in turn, refers to the definition provided in the Bank
Holding Company Act, 12 U.S.C. 1841(a). The Proposed Rule streamlines
these cross references, clarifies that certain provisions of the Bank
Holding Company Act definition are inapplicable in this context, and
adopts the flexible approach of conforming to the relevant provisions
of the Bank Holding Company Act and regulations promulgated thereunder
at the time of appointment of the receiver.
In effect, the Proposed Rule would define ``control'' to include a
company that directly or indirectly or acting through one or more
persons owns, controls, or has the power to vote 25 percent or more of
any class of voting securities of the company. Under the Proposed Rule,
a company may also exercise ``control'' if that company controls in any
manner the election of a majority of the directors or trustees of the
company. This definition is consistent with the Bank Holding Company
Act definition as it has been reflected in regulations promulgated
under that section, including Regulation W (12 CFR 223.3(g)) and
Regulation Y (12 CFR 225.2(e)).
Section 2 of the Dodd-Frank Act expressly adopts the FDI Act
definitions that incorporate the Bank Holding Company Act definitions
``except to the extent the context otherwise requires.'' Parts of the
Bank Holding Company Act definition of ``control'' are inapposite to
the context of section 210(c)(16). Provisions that provide for a
determination of ``control'' made by the Federal Reserve Board of
Governors pursuant to a notice and hearing are inconsistent with the
expedited decisionmaking expressly required by section 210(c)(16) and
would undermine the statutory goal of providing prompt certainty to
counterparties with respect to their contractual rights and remedies.
Adequate Protection
Paragraph (c) of the Proposed Rule describes the different ways
that the Corporation may provide adequate protection in the event that
it does not transfer a covered financial company's support to a
qualified transferee. The definition of adequate protection is
consistent with the definition in section 361 of the Bankruptcy Code,
which also formed the basis of the definition of adequate protection in
the context of treatment of certain secured creditors under 12 CFR
380.52. Adequate protection may include any of the following: (1)
Making a cash payment or periodic cash payments to the counterparties
of the contract to the extent that the failure to cause the assignment
and assumption of the covered financial company's support and related
assets and liabilities causes a loss to the counterparties; (2)
providing to the counterparties a guaranty, issued by the Corporation
as receiver for the covered financial company, of the obligations of
the subsidiary or affiliate of the covered financial company under the
contract; or (3) providing relief that will result in the realization
by the claimant of the indubitable equivalent of the covered financial
company's support. The phrase ``indubitable equivalent,'' which appears
in section 361 of the Bankruptcy Code, is intended to have a meaning
consistent with its meaning in bankruptcy, in conformance with section
209 of the Dodd-Frank Act that requires rules promulgated under Title
II of the Act to be ``harmonized'' with the Bankruptcy Code where
possible.
It is important to note that although a guaranty of the Corporation
as receiver is expressly included among the enumerated examples of
``adequate protection'' in paragraph (c) of the Proposed Rule, the
omission of such specific reference in 12 CFR 380.52 is not intended to
suggest that such a guaranty would not constitute adequate protection
to secured creditors under to 12 CFR 380.52. The guaranty of the
receiver is, in any event, the indubitable equivalent of any guaranty
or support that it may replace, and the express mention of the guaranty
is added only for the avoidance of any doubt. Any such guaranty issued
in accordance with the Act would be backed by the assets of the covered
financial company, and also would be supported by the orderly
liquidation fund and the authority of the Corporation as manager of the
orderly liquidation fund to assess the financial industry pursuant to
section 210(o) of the Act. Such a guaranty would in all events qualify
as the indubitable equivalent of any guaranty or support that it may
replace. The express mention of the guarantee is added merely for the
avoidance of any doubt. The NPR will request comment on whether the
interpretation of ``adequate protection'' under Section 380.52 should
be consistent with the interpretation under the Proposed Rule, and
whether Section 380.52 should be amended to include the express
reference to the receiver's guarantee for the sake of consistency and
clarity.
Notice of Transfer or Provision of Adequate Protection
Paragraph (d) of the Proposed Rule provides that if the Corporation
as receiver transfers any support and related assets and liabilities of
the covered financial company or decides to provide adequate protection
in accordance with subparagraphs (a)(1) and 2, it will promptly take
steps to notify contract counterparties of such transfer or provision
of adequate protection. Although the statute does not contain a notice
requirement, the Proposed Rule would require that these reasonable
steps be taken to provide notice in recognition of the practical
reality that contract counterparties will need to know whether they may
exercise remedies under a specified financial condition clause. In
acknowledgement of the public's growing reliance on communication using
the Internet as well as the prevalence of online commerce, the Proposed
Rule provides that the Corporation may post such notice on its public
Web site, the Web site of the covered financial company or the
subsidiary or affiliate, or provide notice via other electronic media.
While the Corporation will endeavor to provide notice in a manner
reasonably calculated to provide notification to the parties in a
timely manner, the provision of actual notice is not a condition
precedent to enforcing such contracts. Any action by a counterparty in
contravention of section 210(c)(16) will be ineffective, whether or not
such counterparty had actual notice of the transfer of support or
provision of adequate protection. Further, where the contract of the
subsidiary or affiliate is linked to the covered financial company but
not otherwise supported by the covered financial company, actual notice
of by the Corporation of its appointment as receiver or its intent to
exercise the authority under section 210(c)(16) is not required.
III. Request for Comments
The FDIC seeks comments on all aspects of the Proposed Rule.
Comments will be considered by the FDIC and appropriate revisions will
be made to the Proposed Rule, if necessary, before a final rule is
issued. Comments are specifically requested on the following:
1. What terms defined by the Proposed Rule require further
clarification, and how should they be defined?
2. Are there other terms used in the Proposed Rule that should be
defined? Should the term ``Business Day'' be defined in the regulation
consistent
[[Page 18133]]
with the definition found in section 210(c)(10)(D) of the Dodd-Frank
Act?
3. Are the scopes of the definitions of ``support'' and ``related
assets and liabilities'' sufficiently broad so as to cover
substantially all of the forms of financial assistance and related
assets and liabilities that a company may provide in support of the
obligations of the subsidiary or affiliate? If the scope is not
sufficiently broad, please provide specific examples if possible.
4. Is the definition of ``control'' used for purposes of
determining whether an entity is a subsidiary or affiliate of the
covered financial company sufficient? Is it sufficiently clear?
5. Is the definition of ``adequate protection'' appropriately
consistent with the definition found elsewhere in Part 380, in
particular with the definition found at 12 CFR 380.52? Is the specific
mention of guarantees of the receiver as a form of adequate protection
necessary to clearly signal that this is one of the options available
to the receiver? If so, should 12 CFR 380.52 be amended to specifically
reference guarantees of the receiver as a form of adequate protection
to assure that these provisions will be interpreted in harmony?
6. Under the Proposed Rule, the Corporation is required to promptly
take steps to notify contract counterparties when the covered financial
company's support and related assets and liabilities have been
transferred to a qualified transferee, or when the Corporation provides
adequate protection with respect to the obligations of a subsidiary or
affiliate of the covered financial company. Are the steps described
reasonably calculated to provide notice? Is the scope of circumstances
in which notice is provided appropriate?
7. Is the Proposed Rule sufficiently clear that no action is
required of the receiver to preserve the enforceability of a contract
as long as the conditions with respect to the transfer of support or
provision of adequate protection are met?
8. Is the Proposed Rule definition of specified financial condition
clear? Is the definition broad enough to cover all orderly liquidation
events from the point at which the covered financial company is
insolvent or in danger of default to the final liquidation and transfer
of assets of the covered financial company? Is it sufficiently limited
to make clear that the ability to enforce contracts is limited to
events arising out of the specified financial condition clause and is
not intended to affect rights or remedies arising out of defaults
unrelated to the financial condition of the covered financial company
or the related exercise of orderly liquidation authority?
IV. Regulatory Analysis and Procedure
A. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (44 U.S.C. 3501, et
seq.) (``PRA''), the FDIC may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a currently valid Office of Management and Budget (OMB)
control number. The Proposed Rule would not involve any new collections
of information pursuant to the Paperwork Reduction Act (44 U.S.C. 3501,
et seq.). Consequently, no information will be submitted to the Office
of Management and Budget for review.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act 5 U.S.C. 601, et seq. (RFA) requires
each federal agency to prepare a final regulatory flexibility analysis
in connection with the promulgation of a final rule, or certify that
the final rule will not have a significant economic impact on a
substantial number of small entities.\1\ Pursuant to Section 605(b) of
the Regulatory Flexibility Act, the FDIC certifies that the Proposed
Rule will not have a significant economic impact on a substantial
number of small entities.
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\1\ See 5 U.S.C. 603, 604 and 605.
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Under regulations issued by the Small Business Administration
(``SBA''), a ``small entity'' includes those firms within the ``Finance
and Insurance'' sector with asset sizes that vary from $7 million or
less in assets to $175 million or less in assets.\2\
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\2\ 13 CFR 121.201.
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The Proposed Rule will clarify rules and procedures for the
liquidation of a nonviable systemically important financial company, to
provide internal guidance to FDIC personnel performing the liquidation
of such a company and to address any uncertainty in the financial
system as to how the orderly liquidation of such a company would be
conducted. As such, the Proposed Rule will not have a significant
economic impact on small entities.
C. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that the Proposed Rule will not affect
family well-being within the meaning of Section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Pub. L. 105-277, 112 Stat. 2681).
D. Plain Language
Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113
Stat. 1338, 1471), requires the Federal banking agencies to use plain
language in all proposed and final rules published after January 1,
2000. The FDIC has sought to present the Proposed Rule in a simple and
straightforward manner.
List of Subjects in 12 CFR Part 380
Banks, banking, Financial companies, Holding companies, Insurance
companies, Mutual insurance holding companies.
For the reasons stated above, the Board of Directors of the Federal
Deposit Insurance Corporation proposes to amends part 380 of title 12
of the Code of Federal Regulations as follows:
PART 380--ORDERLY LIQUIDATION AUTHORITY
1. The authority citation for part 380 is revised to read as
follows:
Authority: 12 U.S.C. 5383(e); 12 U.S.C. 5389; 12 U.S.C.
5390(c)(16); 12 U.S.C. 5390(s)(3); 12 U.S.C. 5390(b)(1)(C); 12
U.S.C. 5390(a)(7)(D).
2. The heading for subpart A is revised to read as follows:
Subpart A--General and Miscellaneous Provisions
Sec.
380.1 Definitions.
380.2 [Reserved]
380.3 Treatment of personal service agreements.
380.4 [Reserved]
380.5 Treatment of covered financial companies that are subsidiaries
of insurance companies.
380.6 Limitation on liens on assets of covered financial companies
that are insurance companies or covered subsidiaries of insurance
companies.
380.7 Recoupment of compensation from senior executives and
directors.
380.8 [Reserved]
380.9 Treatment of fraudulent and preferential transfers.
380.10 Calculation of maximum obligation limitation.
380.11 Treatment of mutual insurance holding companies.
380.12 Enforcement of subsidiary and affiliate contracts by the FDIC
as receiver of a covered financial company.
380.13-380.19 [Reserved]
3. Revise Sec. 380.12 to read as follows:
Sec. 380.12 Enforcement of certain contracts of a subsidiary or
affiliate of the covered financial company.
(a) General. (1) Contracts of subsidiaries or affiliates of a
covered
[[Page 18134]]
financial company that are linked to or supported by the covered
financial company shall remain in full force and effect notwithstanding
any specified financial condition clause contained in such contract and
no counterparty shall be entitled to terminate, accelerate, liquidate
or exercise any other remedy arising solely by reason of such specified
financial condition clause. The Corporation as receiver for the covered
financial company and any qualified transferee shall have the power to
enforce such contracts according to their terms.
(2) Notwithstanding paragraph (a)(1) of this section, if the
obligations under such contract are supported by the covered financial
company then such contract shall be enforceable only if--
(i) Any such support together with all related assets and
liabilities are transferred to and assumed by a qualified transferee
not later than 5 p.m. (eastern time) on the business day following the
date of appointment of the Corporation as receiver for the covered
financial company; or
(ii) If and to the extent paragraph (a)(2)(i) of this section is
not satisfied, the Corporation as receiver otherwise provides adequate
protection to the counterparties to such contracts with respect to the
covered financial company's support of the obligations or liabilities
of the subsidiary or affiliate and provides notice consistent with the
requirements of paragraph (d) of this section not later than 5 p.m.
(eastern time) on the business day following the date of appointment of
the Corporation as receiver.
(3) The Corporation as receiver of a subsidiary of a covered
financial company (including a failed insured depository institution
that is a subsidiary of a covered financial company) may enforce any
contract that is enforceable by the Corporation as receiver for a
covered financial company under paragraphs (a)(1) and (a)(2) of this
section.
(b) Definitions. For purposes of this part, the following terms
shall have the meanings set forth below:
(1) A contract is ``linked'' to a covered financial company if it
contains a specified financial condition clause that specifies the
covered financial company.
(2)(i) A ``specified financial condition clause'' means any
provision of any contract (whether expressly stated in the contract or
incorporated by reference to any other contract, agreement or document)
that permits a contract counterparty to terminate, accelerate,
liquidate or exercise any other remedy under any contract to which the
subsidiary or affiliate is a party or to obtain possession or exercise
control over any property of the subsidiary or affiliate or affect any
contractual rights of the subsidiary or affiliate directly or
indirectly based upon or by reason of
(A) A change in the financial condition or the insolvency of a
specified company that is a covered financial company;
(B) The appointment of the FDIC as receiver for the specified
company or any actions incidental thereto including, without
limitation, the filing of a petition seeking judicial action with
respect to the appointment of the Corporation as receiver for the
specified company and the issuance of recommendations or determinations
of systemic risk;
(C) The exercise of rights or powers by the Corporation as receiver
for the specified company, including, without limitation, the
appointment of the Securities Investor Protection Corporation (SIPC) as
trustee in the case of a specified company that is a covered broker-
dealer and the exercise by SIPC of all of its rights and powers as
trustee;
(D) The transfer of assets or liabilities to a bridge financial
company or other qualified transferee;
(E) Any actions taken by the FDIC as receiver for the specified
company to effectuate the liquidation of the specified company; or (vi)
any actions taken by or on behalf of the bridge financial company to
operate and terminate the bridge financial company including the
dissolution, conversion, merger or termination of a bridge financial
company or actions incidental or related thereto.
(ii) Without limiting the general language of paragraphs (b)(1) and
(b)(2) of this section, a specified financial condition clause includes
a ``walkaway clause'' as defined in 12 U.S.C. 5390(c)(8)(F)(iii) or any
regulations promulgated thereunder.
(3) The term ``support'' means undertaking any of the following for
the purpose of supporting the contractual obligations of a subsidiary
or affiliate of a covered financial company for the benefit of a
counterparty to a linked contract--
(i) To guarantee, indemnify, undertake to make any loan or advance
to or on behalf of the subsidiary or affiliate;
(ii) To undertake to make capital contributions to the subsidiary
or affiliate; or
(iii) To be contractually obligated to provide any other financial
assistance to the subsidiary or affiliate.
(4) The term ``related assets and liabilities'' means--
(i) Any assets of the covered financial company that directly serve
as collateral for the covered financial company's support (including a
perfected security interest therein or equivalent under applicable
law);
(ii) Any rights of offset or setoff or netting arrangements that
directly arise out of or directly relate to the covered financial
company's support of the obligations or liabilities of its subsidiary
or affiliate; and
(iii) Any liabilities of the covered financial company that
directly arise out of or directly relate to its support of the
obligations or liabilities of the subsidiary or affiliate.
(5) A ``qualified transferee'' means any bridge financial company
or any third party (other than a third party for which a conservator,
receiver, trustee in bankruptcy, or other legal custodian has been
appointed, or which is otherwise the subject of a bankruptcy or
insolvency proceeding).
(6) A ``subsidiary'' means any company which is controlled by
another company at the time of, or immediately prior to, the
appointment of receiver of the covered financial company.
(7) An ``affiliate'' means any company that controls, is controlled
by, or is under common control with another company at the time of, or
immediately prior to, the appointment of receiver of the covered
financial company.
(8) The term ``control'' has the meaning given to such term under
12 U.S.C. 1841(a)(2)(A) and (B) as such law, or any successor, may be
in effect at the date of the appointment of the receiver, together with
any regulations promulgated thereunder then in effect.
(c) Adequate Protection.
The Corporation as receiver for a covered financial company may
provide adequate protection with respect to a covered financial
company's support of the obligations and liabilities of a subsidiary or
an affiliate pursuant to paragraph (a)(2)(ii) of this section by any of
the following means:
(1) Making a cash payment or periodic cash payments to the
counterparties of the contract to the extent that the failure to cause
the assignment and assumption of the covered financial company's
support and related assets and liabilities causes a loss to the
counterparties;
(2) Providing to the counterparties a guaranty, issued by the
Corporation as receiver for the covered financial company, of the
obligations of the subsidiary or affiliate of the covered financial
company under the contract; or
(3) Providing relief that will result in the realization by the
counterparty of the indubitable equivalent of the
[[Page 18135]]
covered financial company's support of such obligations or liabilities.
(d) Notice of Transfer of Support or Provision of Adequate
Protection.
If the Corporation as receiver for a covered financial company
transfers any support and related assets and liabilities of the covered
financial company in accordance with paragraph (a)(2)(i) of this
section or provides adequate protection in accordance with paragraph
(a)(2)(ii) of this section, it shall promptly take steps to notify
contract counterparties of such transfer or provision of adequate
protection. Notice shall be given in a manner reasonably calculated to
provide notification in a timely manner, including, but not limited to,
notice posted on the Web site of the Corporation, the covered financial
company or the subsidiary or affiliate, notice via electronic media, or
notice by publication. Neither the failure to provide actual notice to
any party nor the lack of actual knowledge on the part of any party
shall affect the authority of the Corporation or a qualified transferee
to enforce any contract or exercise any rights or powers under this
section.
Dated at Washington, DC, this 20th day of March 2012.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2012-7051 Filed 3-26-12; 8:45 am]
BILLING CODE 6714-01-P