On December 20, 2016, the US Office of the Comptroller of the Currency (“OCC”) issued a final rule that will govern the resolution of uninsured national banks (the “Final Rule”).1 The OCC is the chartering authority for all national banks and federal savings associations. All federal savings associations must obtain deposit insurance from the Federal Deposit Insurance Corporation (“FDIC”), so federal savings associations are not covered by the Final Rule. The FDIC acts as the receiver or conservator for failed insured depository institutions. The National Bank Act (“NBA”) does not require national banks to have deposit insurance, and a number of national banks engaged solely in fiduciary activities operate without deposit insurance. While no uninsured national banks have failed since the Great Depression, the OCC issued the Final Rule to provide greater clarity to market participants regarding the receivership process for uninsured national banks.
Scope of the Final Rule
The Final Rule covers uninsured national banks that have limited their operations solely to providing fiduciary services (“uninsured trust banks”)2 and special-purpose national banks that are engaged in at least one core banking function. The latter group is intended to capture the special-purpose national bank (“SPNB”) charter for entities engaged in core banking functions related to financial technology that the OCC recently announced as part of its initiative on responsible innovation.3 To the extent that an SPNB obtained deposit insurance, the FDIC would act as receiver. Importantly, the Final Rule does not cover the resolution of uninsured federal branches and agencies of foreign banks even though those institutions are also resolved by the OCC.
Receivership Process Under the Proposed Rule
The Final Rule sets out the OCC’s authority to appoint a receiver for an uninsured national bank. Under the NBA, the conditions for appointing a receiver include (i) one of 13 grounds identified in the Federal Deposit Insurance Act (“FDIA”)4 or (ii) the national bank’s board of directors having fewer than five members.5 While a court cannot appoint a receiver, a national bank may seek judicial review of the appointment of the receiver by the OCC.
The Final Rule will govern the receivership process whether the OCC appointed itself or a third party as receiver. If the OCC appointed itself as receiver, it would act in two capacities with respect to the failed institution. This dual-capacity arrangement, while complicated to administer, is well established in the context of FDIC receiverships, and claims or judgments concerning the receivership are satisfied from the receivership estate, not from the OCC’s operating budget.
The Final Rule’s mechanisms for the appointment of a receiver, public notice of the receivership, claims submission and adjudication, receivership expenses, powers of the receiver, and shareholder rights are identical to those set forth in the OCC’s September 2016 proposed rule (the “Proposed Rule”)6 and generally similar to those used by the FDIC for receiverships of failed insured depository institutions. However, the receivership process established by the Final Rule differs from the FDIC’s procedures in several important ways. First, claimants may simultaneously pursue the resolution of claims against the failed institution (i) through the OCC’s administrative processes and (ii) in a court of competent jurisdiction. Claimants are not required to exhaust their administrative remedies prior to pursuing any court action. Second, the order of priorities for distribution of the receivership’s assets does not include deposit liabilities or any depositor or consumer preference. Unlike insured depository institutions, uninsured banks will not have traditional deposits, so no depositor preference is provided by the Final Rule. The OCC also determined that it did not have authority under the NBA to distinguish between unsecured claims of consumers and general creditors. Third, the NBA does not expressly provide the OCC with some of the specific powers granted to the FDIC in its capacity as receiver under the FDIA. The Final Rule provides that the receiver for an uninsured national bank may exercise other rights, privileges and powers authorized for receivers of national banks under the NBA and the common law of receiverships as applied by the courts to receiverships of national banks under the NBA. Therefore, receivership powers regarding repudiation, fraudulent transfers and “secret agreements” are established by judicial precedent and common law. Fourth, the OCC indicated in the preamble to the Final Rule that the receiver of an uninsured national bank will have the authority (with court approval) to transfer fiduciary accounts and related assets to a successor fiduciary notwithstanding contrary state law. This preemption of state fiduciary law under the NBA is consistent with cases holding that the FDIC acting as receiver has authority under federal law to transfer fiduciary assets regardless of state law.
In the Proposed Rule, the OCC asked whether the application of the NBA legal framework for receiverships of SPNBs would raise any unique considerations.7 This generated significant interest within the financial services industry because it touched on the possibility of a “fintech charter,” which was not previously available as an option for prospective applicants. In many ways, this interest overshadowed the receivership provisions described in the proposal, as evidenced by the relative dearth of comment letters on the substantive receivership provisions. Subsequently, the OCC announced in the December 2016 White Paper that it would consider applications from fintech companies for an SPNB charter. In connection with that announcement, the OCC requested comments on how it should administer the operation of these SPNBs. The OCC noted that it had considered receivership-relevant comments in the course of adopting the Final Rule and indicated that it would address broader SPNB-related comments in its response to comments on the December 2016 White Paper.
The Final Rule becomes effective on January 19, 2017. The Final Rule is not expected to generate many issues for the financial services industry because of its consistency with the FDIC’s procedures and the rarity of uninsured national bank failures. That said, with the somewhat vaguely defined contours of the SPNB charter, it is difficult to address the Final Rule’s likely effect without a better understanding of the requirements or the exact nature of the activities being conducted. The probability of failure and the steps required to resolve a failed entity may greatly differ depending upon the activities. For example, an SPNB engaged in lending activities would present different concerns than an entity engaged in payment-related activities. Furthermore, the SPNB charter could have a higher rate of failure than uninsured trust banks and present more challenges in receivership. Nevertheless, those within the financial services and technology communities should view the Final Rule and the December 2016 White Paper as positive signals that the OCC is moving forward with the development of an SPNB charter.1 81 Fed. Reg. 92,594 (Dec. 20, 2016).
2 The OCC indicated that there were 52 uninsured trust banks as of December 2016.
3 See OCC, Exploring Special Purpose National Bank Charters for Fintech Companies (Dec. 2, 2016) [hereinafter December 2016 White Paper] and our Legal Update on that development.
4 The FDIA sets forth the following 13 grounds for appointment of receiver: (i) insufficient assets relative to obligations; (ii) the substantial dissipation of assets or earnings due to a violation of law or an unsafe or unsound practice; (iii) an unsafe or unsound condition to transact business; (iv) a willful violation of a cease-and-desist order; (v) concealment of records; (vi) a likely inability to meet obligations; (vii) likely losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the bank to become adequately capitalized without US federal government assistance; (viii) a violation of law or an unsafe or unsound practice that is likely to cause insolvency, the substantial dissipation of assets, a weakening of the bank’s condition or seriously prejudice the interests of depositors or the deposit insurance fund; (ix) consent by the bank; (x) cessation of insured status; (xi) undercapitalization coupled with circumstances in which that undercapitalization is unlikely to be reversed; (xii) critical undercapitalization; and (xiii) conviction of a money-laundering offense. 12 U.S.C. § 1821(c)(5).
5 12 U.S.C. § 191a.
6 81 Fed. Reg. 62,835 (proposed Sept. 13, 2016).
7 81 Fed. Reg. at 62,837.