Orderly Liquidation Authority Regulation

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Gavel.png FINAL RULES: Orderly Liquidation Rules issued July 15, 2011
FDIC Final Rule: Calculation of Maximum Obligation Limitation issued April 23, 2012
OCC Final Rule: Annual Stress Tests issued October 9, 2012
Dodd-Frank Timeline, Interim Final Rule on Orderly Liquidation Provisions, FDIC
Final Rule Issued Effective Date Comment Deadline
January 25, 2011 January 25, 2011 March 28, 2011
Dodd-Frank Timeline, Claims Process under Orderly Liquidation Authority Provisions, FDIC
Proposal Date Comment Deadline Final Rule Issue
March 23, 2011 May 23, 2011 August 15, 2011
Dodd-Frank Timeline, Calculation of Maximum Obligation Limitation, FDIC
Proposal Date Comment Deadline Final Rule Issue
November 25, 2011 January 24, 2012 April 23 2012

In accordance with Title II of the Dodd-Frank Act, the FDIC is required to establish rules regarding the orderly liquidation in case of a default of a "covered financial company," which is defined as financial company that poses significant risk to the financial stability of the United States. The Act outlines the process for the orderly liquidation of such a covered financial company following the FDIC’s appointment as receiver and provides for additional implementation of the orderly liquidation authority (OLA) by rulemaking. An interim final rule was proposed and entered into the Federal Register on January 25, 2011. The interim rule became effective on January 25, 2011.[1]

A second rule proposal was issued by the FDIC in March 2011. This proposal builds upon the interim final rule and provides a “roadmap” for creditors to better understand their substantive and procedural rights under Title II, defining key elements that determine the processing and priority of claims and payments. The final rule was published on July 15, 2011 and became effective on August 15, 2011.[2][3]

In June 2012, the FDIC proposed a rule that would amend the definition of "financial activity" for purposes of determining whether an entity is "predominantly engaged" in financial activities. View this proposal HERE.

In October 2012, in separate rulemakings, the FDIC and Office of the Comptroller of the Currency published final rules regarding the stress testing of banks, pursuant to Section 165 of the Dodd-Frank Act.

Background and Timeline

October 2010

On October 19, 2010, the FDIC published in the Federal Register a notice of proposed rulemaking to implement certain orderly liquidation provisions of Title II of Dodd-Frank, namely:

  • the payment of similarly situated creditors;
  • the honoring of personal services contracts;
  • the recognition of contingent claims;
  • the treatment of any remaining shareholder value in the case of a covered financial company that is a subsidiary of an insurance company; and
  • limitations on liens that the FDIC may take on the assets of a covered financial company that is an insurance company or covered subsidiary.

The comment letters from the October 19, 2010 NPRM provided guidance for the interim final rule, specifically as related to moral hazard and the order of claims resulting from bankruptcy..

January 2011

On January 25, 2011, the FDIC issued an Interim Final Rule on the Orderly Liquidation Authority. Among the provisions:

  • Definitions. "bridge financial company," "Corporation", "covered financial company," "covered subsidiary," and "insurance company."
  • Treatment of Similarly Situated Creditors. The receivership has discretion to treat similarly situated creditors differently to maximize value of assets, initiate and continue operations, maximize the present value return of assets, or minimize the loss on sale of assets.
  • Insurance Companies. If an insurance company is a "covered financial company" FDIC orderly liquidation procedures may supersede state laws

The proposal, which can be found below, is intended to provide greater clarity about how the OLA will be implemented. The FDIC may avoid taking a lien on the assets of an insurance company unless it determines that such a lien is necessary for orderly liquidation.

March 2011

Additional definitions, or refinements to terms defined in the prior rule proposal, are included in the March 2011 proposal:

  • Predominantly engaged in financial activities: if the consolidated revenues of such company from such activities constitute at least 85 percent of the total consolidated revenues over the past two years.
  • Financial Activity: any activity described in "section 225.86 of the Board of Governors’ Regulation Y" or any successor regulation; ownership or control of one or more depository institution[s]; and (iii) any other activity, wherever conducted, determined by the Board to be financial in nature or incidental to a financial activity.

The proposal also lists eleven priority classes of claims, in order of relative priority:

  1. claims with respect to post-receivership debt extended to the covered financial company where such credit is not otherwise available,
  2. other administrative costs and expenses,
  3. amounts owed to the United States,
  4. wages, salaries and commissions earned by an individual within 6 months prior to the appointment of the receiver up to the amount of $11,725 (as adjusted for inflation),
  5. contributions to employee benefit plans due with respect to such employees up to the amount of $11,725 (as adjusted for inflation) times the number of employees,
  6. claims by creditors who have lost setoff rights by action of the receiver,
  7. other general unsecured creditor claims,
  8. subordinated debt obligations,
  9. wages, salaries and commissions owed to senior executives and directors,
  10. post-insolvency interest, which shall be distributed in accordance with the priority of the underlying claims, and
  11. distributions on account of equity to shareholders and other equity participants in the covered financial company.

July 2011

On July 15, 2011, the FDIC issued a final rule that addresses comments on the January 25, 2011 Interim Final rule and the Phase II Orderly Liquidation rule. This rule includes provisions for:

  • the recoupment of compensation from senior executives and directors;
  • the power to avoid fraudulent or preferential transfers;
  • the priorities of expenses and unsecured claims; and
  • the administrative process for initial determination of claims.

The rule became effective August 15, 2011.

Read final rule.png

November 2011

On November 25, 2011, the FDIC and Department of the Treasury, in consultation with the Orderly Liquidation Authority, approved a proposed rule and request for comment regarding the calculation of a maximum obligation limitation ("MOL") that would limit the amount that the FDIC may issue or incur in connection with the orderly liquidation of a covered financial entity.

Read comment letters.png
Read proposed rule.png

April 2012 On April 23, 2012, On November 25, 2011, the FDIC and Department of the Treasury, in consultation with the Orderly Liquidation Authority, approved the final rule regarding the maximum obligation limit under the Orderly Liquidation Authority.

Read final rule.png

June 2012 On June 18, 2012, the FDIC issued a proposed rule that would define which activities are to be considered "financial in nature" for purposes of determining whether a company is "predominantly engaged" in financial activity under the Orderly Liquidation Authority (OLA). [4]

Read proposed rule.png

References

  1. Orderly Liquidation Authority Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Federal Register. Retrieved on March 16, 2011.
  2. Orderly Liquidation Authority Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Federal Register. Retrieved on March 16, 2011.
  3. FDIC Board Approves Proposed Rule to Set Claims Process Under the Dodd-Frank Act's Orderly Liquidation Authority Provisions. FDIC. Retrieved on March 16, 2011.
  4. Board of Directors Memorandum, June 12, 2012. FDIC. Retrieved on June 18, 2012.

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