The Federal Deposit Insurance Corporation (FDIC) has announced that the agenda for its board meeting next Tuesday, January 18, 2011, will include discussion regarding a “Final Rule Implementing Certain Orderly Liquidation Authority Provisions of the Dodd-Frank Act.”
Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted to help avoid a repeat of the chaos that followed the collapse of Lehman Brothers in 2008 and the ensuing bailouts of “too big to fail” financial institutions. Title II creates the Orderly Liquidation Authority (OLA), a liquidation framework for the resolution of certain nonbank financial companies by the FDIC, as receiver. The term “financial companies” is generally defined to include (i) bank holding companies, (ii) nonbank financial companies that are subject to regulation by the Federal Reserve Board under Title I of the Dodd-Frank Act, (iii) companies that are “predominantly engaged” in activities that the Federal Reserve Board has determined are of a financial nature or are incidental thereto and (iv) any subsidiary of the foregoing that is predominantly engaged in such activities. OLA is intended to provide the FDIC with the tools to conduct an orderly liquidation of such companies and their subsidiaries in certain circumstances.
Under OLA, a financial company that is determined to be a “covered financial company” can be liquidated pursuant to the terms of the OLA rather than the Bankruptcy Code. Treatment as a covered financial company requires determinations by the Secretary of the Treasury (in consultation with the President) that, among other things, the financial company is “in default or in danger of default,” the failure of the financial company and its resolution under otherwise applicable law “would have serious adverse effects on financial stability in the United States” and “no viable private sector alternative is available.”
If these necessary determinations are made and the other statutory provisions are satisfied, the FDIC is appointed as receiver for the financial company and an orderly liquidation under OLA is commenced. In specific situations, the FDIC can also appoint itself as receiver of certain of the company’s subsidiaries.
The OLA process differs from the Bankruptcy Code regime in a number of ways. First, in many respects, the FDIC’s powers under OLA parallel the resolution authority currently exercised by the FDIC for insured depository institutions under the Federal Deposit Insurance Act. The FDIC’s powers under OLA include the ability to: take over the assets of and operate the financial company; sell assets or transfer assets to a bridge financial company and merge the covered financial company with another company; avoid fraudulent transfers and preferences; and repudiate certain contracts, including qualified financial contracts and indebtedness.
Second, the proceedings, standards and many substantive provisions of OLA differ from those of the Bankruptcy Code in potentially important ways. For example, the OLA provisions defining when a transfer occurs for the purpose of a preferential transfer analysis differ from those of the Bankruptcy Code. As a result, in circumstances where perfection of such transfers by possession or other means could trump perfection by the filing of a financing statement under the Uniform Commercial Code (such as transactions involving the transfer or pledge of chattel paper or instruments), there may be a greater risk under OLA than under the Bankruptcy Code that such previous transfers of property by a party subject to an OLA receivership could be avoided as preferential transfers. This risk could potentially impact a large number of secured loans and structured finance transactions, as well as all lenders that take such categories of personal property as collateral.
However, in December 2010, the Acting General Counsel of the FDIC issued a General Counsel’s Letter (the “FDIC Letter”) providing an interpretation of OLA that concludes that the treatment of preferential and fraudulent transfers under OLA was intended to be consistent with, and should be interpreted in a manner consistent with, the related provisions under the Bankruptcy Code. The FDIC Letter also states that the Acting General Counsel will recommend that the FDIC Board of Directors adopt regulations to the same effect. The FDIC Letter is not, however, a regulation; it is not binding on the FDIC and could be modified or withdrawn in the future.
Title II became effective on July 22, 2010 and, therefore, OLA is currently available if a financial company experiences financial difficulty. However, under Section 209 of Title II, the FDIC (in consultation with the Financial Stability Oversight Council) is required to prescribe such rules or regulations as it considers necessary to implement OLA. There is no statutory deadline for the issuance of such rules.
On October 19, 2010, the FDIC published proposed rules to address certain discrete aspects of OLA, such as when the FDIC can treat similarly situated claimants differently, when payments to creditors can be clawed back and the treatment of personal services contracts under OLA. Comments on these proposed rules were due by November 18, 2010. The proposing release also asked several general questions about OLA and the need for additional regulations, and responses to most of the questions are due next Tuesday, January 18, 2011.
While the timing of future actions with respect to OLA is unclear, the FDIC board of directors is scheduled to discuss the issuance of final rules related to certain aspects of OLA at next week’s meeting and it is widely anticipated that the FDIC will publish additional proposed rules for public comment in the first quarter of 2011. Therefore, all interested parties should anticipate additional developments regarding the topic shortly.
For more information about the Orderly Liquidation Authority or any other matter raised in this Legal Update, please contact William V. Jacobsen, Jr. at +1 312 701 7097, Bradley J. Keck at +1 312 701 7240, or Jeffrey P. Taft at +1 202 263 3293.