Final Rule Summarized - FDIC Issues Final Rule on Orderly Liquidation Authority
On July 6, 2011, the FDIC issued a final rule implementing certain orderly liquidation authority provisions of the Dodd-Frank Act. Under Dodd-Frank, the FDIC may serve as receiver for a financial company if the failure of the company and its liquidation under the Bankruptcy Code or other insolvency procedures would pose a significant risk to the financial stability of the US.
The final rule is intended to provide greater clarity on the FDIC's powers as receiver and how the claims process under the FDIC's orderly liquidation authority will work. It follows a January 2011 interim final rule covering the payment of similarly situated creditors and the honoring of personal services contracts and a March 2011 proposed rule covering living wills, clawback of executive compensation, priority of claims and other related matters. The final rule largely coincides with the interim final rule and the proposed rule but contains several key differences.
The final rule largely coincides with the interim final rule and the proposed rule but contains the following key differences:
- Recoupment of compensation from senior executives and directors. The final rule clarifies that the appropriate standard of care to determine whether to recover compensation paid to senior executives and directors is a negligence rather than a gross negligence standard. The FDIC must deem a senior executive or director "substantially responsible" for a covered financial company's failure if that person did not conduct his or her duties "with the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances."
- Defining "predominantly engaged" in financial activities. Because of ongoing discussions with the Federal Reserve to create joint criteria for this definition, the FDIC has not included this definition in the final rule. The FDIC will publish this definition in a separate notice in the Federal Register.
- Priority of payments and contractual subordination agreements. To make priority of payments for unsecured creditors more consistent with the Bankruptcy Code, the final rule includes a provision providing that contractual subordination agreements will be respected.
- Amounts owed to the US. The final rule adopts a narrower definition of "amounts owed to the United States" by clarifying that this term only includes amounts advanced to a covered financial company to promote the company's orderly resolution or to avoid adverse effects on the financial stability of the US.
- Priority of claims arising out of loss of setoff rights. The final rule states that the provisions contained in 12 C.F.R. Section 380.24 addressing the priority of claims of creditors that have lost setoff rights have no effect on the provisions of Dodd-Frank that relate to netting rights in connection with qualified financial contracts.
- Receivership claims process. The final rule provides that the receivership claims process does not apply to claims against a bridge financial company, assets or liabilities of a bridge financial company, or extensions of credit from a Federal Reserve Bank or the FDIC to a covered financial company.
- Late-filed claims. The final rule provides that claimants may submit late-filed claims if the claims based on an act or omission of the FDIC as receiver due to a breach or repudiation that occurs after the bar date.
- Contingent claims. The final rule clarifies that the receiver must estimate the value of a contingent claim as of the date the receiver was appointed, rather than before the final distribution.
- Secured claims. The final rule contains several provisions clarifying the rights of secured claimants. These provide:
- how to determine the fair market value of property underlying a secured claim;
- that a secured creditor may request the consent of the receiver to dispose of or liquidate collateral; and
- that secured creditors must receive adequate protection through cash payments, replacement liens or other relief in the event the receiver wishes to use or sell property subject to a security interest.
- Consent. The final rule provides that holders of qualified financial contracts do not need the receiver's consent before exercising their contractual rights against property of the covered financial company.
The effective date of the final rule is 30 days after publication in the Federal Register.