Home -> Law Blog Directory -> Corporate & Securities Law Blogs -> Jim Hamilton's World of Securities Regulation

Corporate & Securities Law

: Jim Hamilton's World of Securities Regulation

FDIC Proposes Rules under Title II of Dodd-Frank Allowing Different Treatment for Essential Creditors

By Jim Hamilton

The FDIC proposes to use its Dodd-Frank authority to liquidate failing systemically important securities, commodities, and other non-bank financial firms by sparingly differentiating among creditors. The authority to differentiate among creditors will be used rarely and only where such additional payments are, in the words of Dodd-Frank, essential to the implementation of the FDIC receivership of the failing firm or any bridge financial company. FDIC Chair Shelia Bair assured at an earlier roundtable that Dodd-Frank gives the FDIC has the ability to differentiate among creditors, but that the power will be used sparingly. The proposed rulemaking will be in consultation with the SEC and CFTC and other Financial Stability Oversight Council members, in accordance with the wishes of the Dodd-Frank Act.

Title II of the Dodd-Frank Act establishes an orderly liquidation authority to unwind complex systemically important securities, commodities and other financial firms whose failure could put the entire financial system in jeopardy. The FDIC is the designated receiver of such a financial firm. Thus, Dodd-Frank gives the FDIC the tools to resolve a failing financial company that poses a significant risk to the financial stability of the United States. The legislation creates a framework to resolve any financial institution, no matter how large or complex. The orderly liquidation process established under Title II of the Dodd-Frank Act imposes the losses on shareholders and creditors, while also protecting the economy and taxpayer interests.

If appointed as receiver for a failing systemic financial company, the FDIC has broad authority under the Dodd-Frank Act to operate or liquidate the business, sell the assets, and resolve the liabilities of the company immediately after its appointment as receiver or as soon as conditions make this appropriate. This authority will enable the FDIC to act immediately to sell assets of the company to another entity or, if that is not possible, to create a bridge financial company to maintain critical functions as the entity is wound down. In receiverships of insured depository institutions, the ability to act quickly and decisively has been found to reduce losses to creditors while maintaining key banking services for depositors and businesses. The FDIC will similarly be able to act quickly in resolving non-bank financial companies under the Dodd-Frank Act.

On August 10th, the FDIC created the new Office of Complex Financial Institutions to help ensure that it is always ready to meet this responsibility.

The Notice of Proposed Rulemaking is one step forward in this process. The proposed rule is intended to provide greater clarity and certainty about how certain key components of the resolution authority will be implemented and to ensure that the liquidation process under Title II reflects the Dodd Frank Act?s mandate of transparency.

A special issue of concern during consideration of Dodd-Frank was how the FDIC might use its authority in a liquidation to pay certain creditors of a receivership more than similarly situated creditors if certain criteria are met. The FDIC proposed rulemaking re-affirms that all equity shareholders and unsecured creditors are at risk for loss and that the general rule will be that their claims will be processed in accordance with the priorities established under the federal bankruptcy code which are the same priorities that the FDIC uses in bank receiverships.

The FDIC proposes to confirm that long-term bondholders, subordinated debt holders, and shareholders of a financial company will in no circumstances receive payments above their share to which they are entitled under the priority of payments in the statute. They can never be essential to the receivership or the bridge. This is consistent with the clear intent of the statute and it is important that creditors have clarity in their treatment in a future liquidation. This is also consistent with the approach the FDIC has taken in receivership process for banks. Dodd-Frank authorizes the FDIC to differentiate among creditors where it will maximize recoveries.

Full post as published by Jim Hamilton's World of Securities Regulation on October 12, 2010 (boomark / email).