Orderly Liquidation Authority, 16324-16345 [2011-6705]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 76, Number 56 (Wednesday, March 23, 2011)]
[Proposed Rules]
[Pages 16324-16345]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-6705]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 380

RIN 3064-AD73


Orderly Liquidation Authority

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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[[Page 16325]]

SUMMARY: The FDIC is proposing and requests comments on a rule that 
would implement certain provisions of its authority to resolve covered 
financial companies under Title II of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (the ``Dodd-Frank Act'' or the ``Act''). 
This proposed rule (``Proposed Rule'') builds on the interim final rule 
published by the FDIC on January 25, 2011 (``Interim Final Rule'') to 
address additional provisions of Title II. The Proposed Rule addresses 
the following issues: the definition of a ``financial company'' subject 
to resolution under Title II by establishing criteria for determining 
whether a company is ``predominantly engaged in activities that are 
financial in nature or incidental thereto;'' recoupment of compensation 
from senior executives and directors, in limited circumstances, as 
provided in section 210(s) of the Dodd-Frank Act; application of the 
power to avoid fraudulent or preferential transfers; the priorities of 
expenses and unsecured claims; and the administrative process for 
initial determination of claims and the process for judicial 
determination of claims disallowed by the receiver.

DATES: Written comments must be received by the FDIC not later than May 
23, 2011.

ADDRESSES: You may submit comments by any of the following methods:
     Agency Web Site: https://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on 
the Agency Web Site.
     E-mail: Comments@FDIC.gov. Include ``RIN 3064-AD73'' in 
the subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m. (EDT).
     Federal eRulemaking Portal: https://www.regulations.gov/. 
Follow the instructions for submitting comments.
     Public Inspection: All comments received will be posted 
without change to https://www.fdic.gov/regulations/laws/federal/propose.html including any personal information provided. Paper copies 
of public comments may be ordered from the Public Information Center by 
telephone at (703) 562-2200 or 1-877-275-3342.

FOR FURTHER INFORMATION CONTACT: Marc Steckel, Associate Director, 
Division of Insurance and Research, 202-898-3618; or R. Penfield 
Starke, Senior Counsel, Legal Division, (703) 562-2422. For questions 
to the Legal Division concerning the following parts of the Proposed 
Rule contact:
    Definition of predominantly engaged in financial activities: Ryan 
K. Clougherty, Senior Attorney (202) 898-3843.
    Avoidable transfer provisions: Phillip E. Sloan, Counsel (703) 562-
6137.
    Compensation recoupment: Patricia G. Butler, Counsel (703) 516-
5798.
    Subpart A--Priorities of Claims: Elizabeth Falloon, Counsel (703) 
562-6148.
    Subpart B--Receivership Administrative Claims Procedures: Thomas 
Bolt, Supervisory Counsel (703) 562-2046.

SUPPLEMENTARY INFORMATION:

I. Background

    The Dodd-Frank Act was enacted on July 21, 2010. Title II of the 
Dodd-Frank Act provides for the appointment of the FDIC as receiver of 
a covered financial company following the prescribed recommendation, 
determination and judicial review process set forth in the Act. Title 
II 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 by rulemaking. The Proposed Rule is intended to provide 
clarity and certainty with respect to how key components of the orderly 
liquidation authority will be implemented and to ensure that the 
liquidation process under Title II reflects the Dodd-Frank Act's 
mandate of transparency in the liquidation of covered financial 
companies. Among the significant issues addressed in the Proposed Rule 
are the priority for the payment of claims and the process for the 
determination of claims by the receiver and for seeking a judicial 
adjudication of any claims disallowed in whole or in part. While it is 
not expected that the FDIC will be appointed as receiver for a covered 
financial company in the near future, it is important for the FDIC to 
have rules in place in a timely manner in order to allow stakeholders 
to plan transactions going forward.
    The Proposed Rule is promulgated under section 209 of the Act which 
authorizes the FDIC, in consultation with the Financial Stability 
Oversight Council, to prescribe such rules and regulations as the FDIC 
considers necessary or appropriate to implement Title II. Section 209 
of the Act also provides that, to the extent possible, the FDIC shall 
seek to harmonize such rules and regulations with the insolvency laws 
that otherwise would apply to a covered financial company.
    This is the second rulemaking for the FDIC under section 209. 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. That rulemaking culminated in the Interim Final 
Rule published on January 25, 2011, to be codified at 12 CFR 380.1-
380.6, that addressed discrete topics that were critical for initial 
guidance for the financial industry, including 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 October 19, 2010 notice of proposed rulemaking solicited 
comments not only on the first proposed rule but also on more general 
aspects of the orderly liquidation authority of Title II. This comment 
period ended on January 18, 2011. These comments have been considered 
with respect to the determination of the scope and contents of the 
Proposed Rule.
    The Proposed Rule continues to develop the framework begun with the 
Interim Final Rule. While the Interim Final Rule addressed only certain 
discrete issues under Title II, the Proposed Rule enhances the initial 
framework by addressing broader issues that define the rights of 
creditors in Title II receiverships. For example, while the Interim 
Final Rule specified the treatment of ``similarly situated creditors'' 
in Sec.  380.2, it did not address the treatment of creditors generally 
within the overall structure provided by Title II for the payment of 
creditors. The Proposed Rule takes the next step by defining the 
priorities of payment for creditors in a single rule clarifying the 
meaning of ``administrative expenses'' and ``amounts owed to the United 
States,'' detailing the priority of setoff claims, specifying how post-
insolvency interest will be paid, and clarifying the payment of claims 
for contracts and agreements expressly assumed by a bridge financial 
company. While the Proposed Rule does not alter the rules adopted by 
the Interim Final Rule, certain subsections of that latter rule likely 
will be incorporated into Subpart A on priorities when the Proposed 
Rule is finalized in order to provide greater

[[Page 16326]]

thematic coherence. New Subpart B addresses another key element of 
creditor rights by specifying the process for initial determination of 
claims and the steps necessary to seek a judicial decision on any 
disallowed claims. As a result, the Proposed Rule will provide a 
``roadmap'' for creditors to better understand their substantive and 
procedural rights under Title II by defining key elements determining 
how their claims will be determined and in what priority they will be 
paid. The discrete issues addressed in the IFR should be viewed as 
components that fit within this broader framework.
    Other provisions of the Proposed Rule address other foundational 
elements of Title II. Section 380.8 of the Proposed Rule helps define 
which companies may be subject to resolution under Title II, by 
clarifying the meaning of ``financial company'' in Section 201 of the 
Dodd-Frank Act. Section 380.7 and the amendments to section 380.1 help 
define how compensation may be clawed back from senior executives and 
directors responsible for the failure of the covered financial company 
under section 210(s) of the Dodd-Frank Act. Section 380.9 of the 
Proposed Rule will clarify the application of the receiver's powers to 
avoid fraudulent and preferential transfers to ensure they conform to 
the similar powers under the Bankruptcy Code.
    Some comments revealed unfamiliarity with the FDIC's resolution 
process by stakeholders outside the banking industry. By elaborating on 
the details of the orderly liquidation process, the Proposed Rule seeks 
to explain the role of the FDIC as receiver for a covered financial 
company. While the orderly liquidation process under the Dodd-Frank Act 
resembles the process the FDIC undertakes in the resolution of insured 
depository institutions in many respects, and reflects the experience 
developed by the FDIC in resolving those institutions, these 
regulations implement newly enacted provisions of the Dodd-Frank Act 
and do not necessarily inform or interpret the provisions of the 
Federal Deposit Insurance Act, 12 U.S.C. 1811 et seq. (``FDI Act''), 
and the law governing the resolution of failed insured depository 
institutions. Thus, some provisions implementing the Dodd-Frank Act may 
expand the rights and duties of parties with an interest in the 
resolution, or otherwise provide rights and duties that differ from 
those under the FDI Act.
    A common thread among many comments was the nature of the 
relationship between the orderly liquidation process under the Dodd-
Frank Act and the Bankruptcy Code. Congress mandated that, to the 
extent possible, the FDIC will harmonize the rules adopted under 
section 209 of the Act with the Bankruptcy Code or otherwise applicable 
insolvency laws. While acknowledging certain express differences 
between the Title II orderly liquidation process and other insolvency 
regimes, this Proposed Rule was prepared with this statutory mandate in 
mind.
    Finally, many comments emphasized the importance of allowing 
sufficient time in the rulemaking process to fully consider the complex 
issues raised under the Dodd-Frank Act. This Proposed Rule is a second 
incremental step in the rulemaking process and will invite input from 
stakeholders through additional questions posed as part of the Notice 
of Proposed Rulemaking. Additional rulemaking will follow, including 
certain rules required by the Act, such as rules governing receivership 
termination, receivership purchaser eligibility requirements, records 
retention requirements, as well as the orderly resolution of broker-
dealers, including the priority scheme and claims process applicable to 
broker-dealers.

II. The Proposed Rule

Companies Predominantly Engaged in Financial Activities

    Section 380.8 of the Proposed Rule establishes standards for 
determining if a company is predominantly engaged in financial 
activities. If a company is determined to be predominantly engaged in 
such activities for purposes of the definition of ``financial company'' 
under Title II of the Act, it may be subject to the orderly liquidation 
provisions of Title II.
    Section 201(a)(11) of the Dodd-Frank Act defines ``financial 
company,'' for purposes of Title II of the Act, as any company 
incorporated or organized under any provision of Federal law or the 
laws of any State that is: (i) A bank holding company, as defined in 
section 2(a) of the Bank Holding Company Act of 1956 (``BHC Act''); 
(ii) a nonbank financial company supervised by the Board of Governors 
of the Federal Reserve System (``Board of Governors''); (iii) any 
company that is predominantly engaged in activities that the Board of 
Governors has determined are financial in nature or incidental thereto 
for purposes of section 4(k) of the BHC Act,\1\ or (iv) any subsidiary 
of such companies that is predominantly engaged in activities that the 
Board of Governors has determined are financial in nature or incidental 
thereto for purposes of section 4(k) of the BHC Act, other than a 
subsidiary that is an insured depository institution or insurance 
company.\2\
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    \1\ 12 U.S.C. 1843(k).
    \2\ Section 201(a)(11) also provides that ``financial company'' 
does not include Farm Credit System institutions chartered under and 
subject to the provisions of the Farm Credit Act of 1971, as amended 
(12 U.S.C. 2001 et seq.), or governmental or regulated entities as 
defined under section 1303(20) of the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4502(20)). 
Consistent with section 201(b) of the Dodd-Frank Act, the criteria 
in the Proposed Rule for determining if a company is predominantly 
engaged in financial activities would not apply to such entities.
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    Section 201(b) of the Dodd-Frank Act provides that, for the 
purposes of defining the term ``financial company'' under section 
201(a)(11), ``[n]o company shall be deemed to be predominantly engaged 
in activities that the Board of Governors has determined are financial 
in nature or incidental thereto for purposes of section 4(k) of the 
[BHC Act], if the consolidated revenues of such company from such 
activities constitute less than 85 percent of the total consolidated 
revenues of such company, as the Corporation, in consultation with the 
Secretary [of Treasury], shall establish by regulation. In determining 
whether a company is a financial company under [Title II], the 
consolidated revenues derived from the ownership or control of a 
depository institution shall be included.''
    Accordingly, the FDIC is issuing a regulation that defines the term 
``predominantly engaged'' and creates a new definition of ``financial 
activity'' to encompass the activities the Dodd-Frank Act includes in 
the 85 percent calculation. The FDIC consulted with the Board of 
Governors during the development of this section of the Proposed Rule. 
The Board of Governors has issued a notice of proposed rulemaking 
entitled ``Definitions of `Predominantly Engaged in Financial 
Activities' and `Significant' Nonbank Financial Company and Bank 
Holding Company'' (Board of Governors' NPR).\3\ The Board of Governors' 
NPR addresses the definition of ``predominantly engaged in financial 
activities'' for purposes of determining if an entity is a nonbank 
financial company under Title I of the Dodd-Frank Act.
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    \3\ 76 FR 7731 (February 11, 2011).
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Definition of Predominantly Engaged
    The Proposed Rule defines a company as being predominantly engaged 
in activities that the Board of Governors has determined are financial 
in nature or incidental thereto for purposes of

[[Page 16327]]

section 4(k) of the BHC Act if: (1) At least 85 percent of the total 
consolidated revenues of the company for either of its two most recent 
fiscal years were derived, directly or indirectly, from financial 
activities or (2) based upon all the relevant facts and circumstances, 
the Corporation determines that the consolidated revenues of the 
company from financial activities constitute 85 percent or more of the 
total consolidated revenues of the company. As required under section 
201(b) of the Act, the FDIC consulted with the Secretary of the 
Treasury during the development of this portion of the Proposed 
Rule.\4\
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    \4\ The FDIC also contacted the Board of Governors and other 
voting members of the Financial Stability Oversight Council (FSOC) 
in the development of this section. The FDIC notes that Title I 
includes a separate definition of ``nonbank financial company'' that 
is used for purposes of that Title's provisions related to enhanced 
supervision by the Board of Governors following a systemic 
determination by the FSOC. The Board of Governors has responsibility 
for issuing regulations that define the term ``predominantly engaged 
in financial activities'' for purposes of Title I. The Title I 
definition of nonbank financial company does not take into account 
``incidental'' activities, but does include an asset test in 
addition to a revenue test. See, 12 U.S.C. 5523 et seq.; and 12 
U.S.C. 5531.
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    The case-by-case determination provided for in (2) above is 
designed to provide the FDIC the flexibility, in appropriate 
circumstances, to consider whether a company meets the 85 percent 
consolidated revenue test based on the full range of information that 
may be available concerning the company's activities (including 
information obtained from other Federal or state financial supervisors 
or agencies) at any time. For example, a company's revenues, as well as 
the risks the company may pose to the U.S. financial system, may change 
significantly and quickly as a result of various types of transactions 
or actions, such as a merger, consolidation, acquisition, establishment 
of a new business line, or the initiation of a new activity. Moreover, 
these transactions and actions may occur at any time during a company's 
fiscal year and, accordingly, the effects of the transactions or 
actions may not be reflected in the year-end consolidated financial 
statements of the company for several months. The Proposed Rule allows 
the FDIC to promptly consider the effect of changes in the nature or 
mix of a company's activities as a result of such a transaction or 
action where such changes may affect whether the company should be a 
financial company for purposes of Title II. A determination based on 
the facts and circumstances would be made by the FDIC Board of 
Directors, unless delegated. The FDIC expects to conduct such a case-
by-case review only when justified by the circumstances.
    While section 201(b) of the Dodd-Frank Act provides that a 
company's consolidated revenues are to be used in determining whether 
the company is predominantly engaged in financial activities, it does 
not specify the time period over which such consolidated revenues 
should be considered in making such a determination. The FDIC is 
proposing that either of the last two fiscal years is the appropriate 
time period for determining whether a company meets the 85 percent 
revenue test (the ``two-year test''). The FDIC believes that the two-
year test provides appropriate flexibility in determining whether a 
company is predominantly engaged in financial activities. The two-year 
test would capture, for example, a company whose revenues have 
traditionally met or exceeded the 85 percent consolidated revenue test 
but that experienced a temporary decline in such revenues during its 
last fiscal year. Additionally, the two-year test is similar to a 
proposal recently promulgated by the Board of Governors that addresses 
whether a company is predominantly engaged in financial activities for 
the purposes of determining if such a company is a nonbank financial 
company under Title I.\5\
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    \5\ See, 76 FR 7731 (February 11, 2001).
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    Under the Proposed Rule, a company would not be considered to be 
predominantly engaged in financial activities under the two-year test, 
and thus would not be a financial company, if the level of such 
company's financial revenues were below the 85 percent consolidated 
revenue threshold in both of its two most recent fiscal years. The 
Proposed Rule defines ``total consolidated revenues'' as the total 
gross revenues of a company and all entities subject to consolidation 
by the company for a fiscal year, as determined in accordance with 
applicable accounting standards. ``Applicable accounting standards'' is 
defined under the Proposed Rule as the accounting standards a company 
uses in the ordinary course of business in preparing its consolidated 
financial statements, provided those standards are: (i) U.S. generally 
accepted accounting principles; (ii) International Financial Reporting 
Standards; or (iii) such other accounting standards that the FDIC 
determines to be appropriate.
    The FDIC believes the Proposed Rule's approach to calculating 
consolidated revenue is appropriate for several reasons. First, the 
approach reduces the potential for companies to arbitrage the 85% 
consolidated revenue test by changing the accounting standards used for 
purposes of this Proposed Rule. Specifically, the Proposed Rule 
provides that the accounting standards used for calculating total 
consolidated revenues must be the same standards that the company uses 
in the ordinary course of its business in preparing its consolidated 
financial statements. Second, by calculating consolidated revenues 
using the accounting standards that a company uses in the ordinary 
course of its business, the Proposed Rule also reduces the potential 
regulatory burden on companies. Finally, the FDIC believes the 
methodology for calculating consolidated revenues under the Proposed 
Rule is likely to provide an accurate basis for determining whether 
companies are financial companies for the purposes of Title II.
Definition of Financial Activity
    The Proposed Rule defines ``financial activity'' to include: (i) 
Any activity, wherever conducted, described in section 225.86 of the 
Board of Governors' Regulation Y or any successor regulation; \6\ (ii) 
ownership or control of one or more depository institution[s]; and 
(iii) any other activity, wherever conducted, determined by the Board 
of Governors in consultation with the Secretary of the Treasury, under 
section 4(k)(1)(A) of the BHC Act,\7\ to be financial in nature or 
incidental to a financial activity.
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    \6\ See, 12 CFR 225.86.
    \7\ See, 12 U.S.C. 1843(k)(1)(A).
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    Section 225.86 of the Board of Governors' Regulation Y references 
the activities that have been determined to be financial in nature or 
incidental thereto under section 4(k) of the BHC Act. Section 4(k) of 
the BHC Act authorizes the Board of Governors, in consultation with the 
Secretary of the Treasury, to determine in the future that additional 
activities are ``financial in nature or incidental thereto.'' \8\ The 
Proposed Rule recognizes that the Board of Governors may determine that 
additional activities, beyond those already identified in Sec.  225.86 
of the Board of Governors' Regulation Y, are financial or incidental 
activities for the purposes of section 4(k) of the BHC Act. Upon such a 
determination with respect to an activity, the Proposed Rule includes 
any revenues derived from such activity as revenues derived from 
financial or incidental activities.\9\
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    \8\ 12 U.S.C. 1843(k)(1) and (2).
    \9\ Besides authorizing financial holding companies to engage in 
activities that have been determined to be ``financial in nature or 
incidental thereto'' section 4(k)(1) of the BHC Act also permits a 
financial holding company to engage in activities the Board of 
Governors has determined to be ``complementary to financial 
activities and do not pose a substantial risk to the safety and 
soundness of depository institutions or the financial system 
generally.'' See, 12 U.S.C. 1843(k)(1)(B). Because section 
201(a)(11) refers only to activities that have been determined by 
the Board of Governors to be financial in nature or incidental 
thereto under section 4(k), activities that have been (or are) 
determined to be ``complementary'' to financial activities under 
section 4(k) are not considered financial or incidental activities 
for purposes of determining whether a company is predominantly 
engaged in activities that are financial in nature or incidental 
thereto under section 201(a)(11) of the Dodd-Frank Act.

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[[Page 16328]]

    Neither section 201(a)(11) nor section 201(b) of the Dodd-Frank Act 
impose any additional conditions beyond those that may apply under 
section 4(k) of the BHC Act or the Board of Governors' Regulation Y for 
an activity to be considered a financial or incidental activity for 
purposes of determining whether a company is a financial company under 
Title II. Accordingly, the Proposed Rule broadly defines ``financial 
activities'' to include all financial or incidental activities, 
regardless of: (i) Where the activity is conducted by a company; (ii) 
whether a bank holding company or a foreign banking organization could 
conduct the activity under some legal authority other than section 4(k) 
of the BHC Act; and (iii) whether any Federal or state law other than 
section 4(k) of the BHC Act may prohibit or restrict the conduct of the 
activity by a bank holding company.
    For example, all investment activities that are permissible for a 
financial holding company under the merchant banking authority in 
section 4(k)(4)(H) of the BHC Act and the Board of Governors' 
implementing regulations \10\ are considered financial activities under 
the Proposed Rule even if some portion of those activities could be 
conducted by a financial holding company under another or more limited 
investment authority (such as the authority in section 4(c)(6) of the 
BHC Act,\11\ which allows bank holding companies to make passive, non-
controlling investments in any company if the bank holding company's 
aggregate investment represents less than five percent of any class of 
voting securities and less than 25 percent of the total equity of the 
company). Likewise, all securities underwriting and dealing activities 
are considered financial activities for purposes of the Proposed Rule 
even if a bank holding company or other company affiliated with a 
depository institution may be limited in the amount of such activity it 
may conduct or may be prohibited from broadly engaging in the activity 
under the ``Volcker Rule.'' \12\
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    \10\ See, 12 CFR 225.170 et seq.
    \11\ 12 U.S.C. 1843(c)(6).
    \12\ 12 U.S.C. 1851 et seq.
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Rules of Construction
    To further facilitate determinations under the Proposed Rule and to 
reduce burden, the Proposed Rule includes two rules of construction 
governing the application of the two-year test to revenues derived from 
a company's minority, non-controlling equity investments in 
unconsolidated entities.
    Under the first rule of construction, the revenues derived from a 
company's equity investment in another company (investee company), the 
financial statements of which are not consolidated with those of the 
company under applicable accounting standards, would be considered as 
revenues derived from a financial activity if the investee company 
itself is predominantly engaged in financial activities under the 
revenue test set forth in the Proposed Rule (non-consolidated 
investment rule). Treating all of the revenues derived from such an 
investment as derived from a financial activity based on the aggregate 
mix of the investee company's revenues is consistent with the statutory 
definition of financial company generally, which treats an entire 
company as a financial company if 85 percent of its consolidated 
revenues are derived from financial activities. This approach also 
avoids requiring a company to determine the precise percentage of an 
investee company's activities that are financial in order to determine 
the portion of the company's revenues derived from the investment that 
should be treated as derived from such activities. Lastly, the non-
consolidated investment rule is similar to the approach proposed by the 
Board of Governors for determining whether a nonbank company is 
predominantly engaged in financial activities under Title I.\13\
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    \13\ See, 76 FR 7731 (February 11, 2011).
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    The second rule of construction would permit (but not require) a 
company to treat revenues it derives from certain de minimis equity 
investments in investee companies as not derived from financial 
activities without having to separately determine whether the investee 
company is itself predominantly engaged in financial activities (``de 
minimis rule''). The de minimis rule would be subject to several 
conditions designed to limit the potential for these de minimis 
investments to substantially alter the character of the activities of 
the company.
    Specifically, the de minimis rule provides that a company may treat 
revenues derived from an equity investment in an investee company as 
revenues not derived from financial activities (regardless of the type 
of activities conducted by the investee company), if: (i) The company 
owns less than five percent of any class of outstanding voting shares, 
and less than 25 percent of the total equity, of the investee company; 
(ii) the financial statements of the investee company are not 
consolidated with those of the company under applicable accounting 
standards; (iii) the company's investment in the investee company is 
not held in connection with the conduct of any financial activity (such 
as, for example, investment advisory activities or merchant banking 
investment activities) by the company or any of its subsidiaries; (iv) 
the investee company is not a bank, bank holding company, broker-
dealer, insurance company, or other regulated financial institution; 
and (v) the aggregate amount of revenues treated as nonfinancial under 
the rule of construction in any year does not exceed five percent of 
the company's total consolidated financial revenues.
    The FDIC consulted with the Board of Governors during the 
development of this section of the Proposed Rule. The Board of 
Governors has issued a notice of proposed rulemaking entitled 
``Definitions of `Predominantly Engaged in Financial Activities' and 
`Significant' Nonbank Financial Company and Bank Holding Company'' 
(``Board of Governors' NPR'').\14\ The Board of Governors' NPR 
addresses the definition of ``predominantly engaged in financial 
activities'' for purposes of determining if an entity is a nonbank 
financial company under Title I of the Dodd-Frank Act.
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    \14\ 76 FR 7731 (February 11, 2011).
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Recoupment of Compensation

    Section 380.7 of the Proposed Rule establishes criteria for the 
circumstances under which the FDIC as receiver will seek to recoup 
compensation from persons who are substantially responsible for the 
failed condition of a covered financial company.
Background
    When appointed receiver for a failed covered financial company, the 
FDIC is required to exercise its Title II authority to liquidate 
failing financial companies in a manner that furthers the statutory 
purposes of Title II as set forth in section 204(a) of the Act: 
mitigation of

[[Page 16329]]

significant risk to the financial stability of the United States and 
minimization of moral hazard. In fulfilling these goals, the FDIC must 
``* * * take all steps necessary and appropriate to assure that all 
parties, including management, directors, and third parties, having 
responsibility for the condition of the financial company bear losses 
consistent with their responsibility, including actions for damages, 
restitution, and recoupment of compensation and other gains not 
compatible with such responsibility.'' \15\ In order to carry out this 
mandate, the FDIC as receiver may recover from senior executives and 
directors who were substantially responsible for the failed condition 
of a covered financial company any compensation that they received 
during the two-year period preceding the date on which the FDIC was 
appointed as receiver of the covered financial company, or during an 
unlimited time period in the case of fraud. Section 210(s)(3) of the 
Act directs the FDIC to promulgate regulations to implement the 
compensation recoupment requirements of section 210(s) of the Act. The 
purpose of this section is to provide guidance on how the FDIC will 
implement its authority by identifying the circumstances in which the 
FDIC as receiver will seek to recoup compensation from persons who are 
substantially responsible for the failed condition of a covered 
financial company.
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    \15\ Section 204(a)(3) of the Act.
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Substantially Responsible
    In assessing whether a senior executive or director is 
substantially responsible for the failed condition of the covered 
financial company, the FDIC as receiver will investigate: (1) How the 
senior executive or director performed his or her duties and 
responsibilities, and (2) the results of that performance. Senior 
executives and directors who perform their responsibilities with the 
requisite degree of skill and care will not be required to forfeit 
their compensation. The health of the financial industry depends on 
these persons remaining committed to the industry. If a senior 
executive or director fails to meet the requisite degree of skill and 
care, however, the FDIC as receiver will determine what results that 
failure had on the covered financial company, by considering any loss 
to the covered financial company caused individually or collectively by 
the senior executive or director. Furthermore, to be held responsible, 
the loss to the financial condition must have materially contributed to 
the failure of the covered financial company. The FDIC is considering 
the use of additional qualitative and quantitative benchmarks to 
establish that the loss materially contributed to the failure of the 
covered financial company. Financial indicators under consideration as 
possible benchmarks are assets, net worth and capital, and the 
percentage or magnitude of loss associated with these benchmarks that 
would establish a material loss and trigger substantial responsibility. 
The FDIC solicits comments on these and other potential benchmarks that 
may be used to effectively evaluate loss.
Presumptions
    In the event that the FDIC is appointed as receiver for a covered 
financial company, certain persons will be presumed substantially 
responsible for the financial condition of the company. Substantial 
responsibility shall be presumed when the senior executive or director 
is the chairman of the board of directors, chief executive officer, 
president, chief financial officer, or acts in any other similar role 
regardless of his or her title if in this role he or she had 
responsibility for the strategic, policymaking, or company-wide 
operational decisions of the covered financial company. The FDIC as 
receiver also will presume the substantial responsibility of a senior 
executive or director who has been adjudged by a court or tribunal to 
have breached his or her duty of loyalty to the covered financial 
company. Finally, in order to ensure consistency this presumption also 
extends to a senior executive or director who has been removed from his 
or her position with a covered financial company under section 206(4) 
or section 206(5) of the Act.
    An individual presumed to be substantially responsible for the 
failed condition of a covered financial company based on his or her 
position or role in the covered financial company may rebut the 
presumption of substantial responsibility for the condition of the 
covered financial company by proving that he or she performed his or 
her duties with the requisite degree of skill and care required by the 
position. This determination will be made on a case-by-case basis. A 
senior executive or director presumed to be substantially responsible 
for the failed condition of a covered financial company based on his or 
her removal from his or her position under sections 206(4) or 206(5) of 
the Act, or based on an adjudication that he or she breached his or her 
duty of loyalty to the covered financial company may rebut the 
presumption by proving that he or she did not did not cause, either 
individually or in conjunction with others, a loss to the covered 
financial company that materially contributed to the failure of the 
covered financial company.
Exceptions to Presumptions
    Senior executives or directors who join a covered financial company 
specifically for the purpose of improving its financial condition are 
exempted from this presumption if they were employed by the covered 
financial company for this purpose within the two years preceding the 
appointment of the FDIC as receiver. However, although they are not 
subject to the presumption, the FDIC as receiver may still seek 
recoupment of their compensation if their actions nevertheless 
establish that they are substantially responsible for the failed 
condition of the covered financial company.
    The use of a rebuttable presumption of substantial responsibility 
under certain circumstances is consistent with its use in other 
regulatory and common law areas. The Office of the Comptroller of the 
Currency uses rebuttable presumptions to determine when an individual's 
acquisition of bank stock will result in the acquisition by that 
individual of the power to direct the bank's management or policies. 12 
CFR 5.50. The Social Security Administration uses presumptions to 
establish total disability. 20 CFR part 410. At common law, the 
existence of certain facts, such as exclusive control in negligence 
cases or disparate impact in discrimination cases, is viewed as 
sufficient to require some form of rebuttal evidence.
    The authority of the FDIC as receiver to recoup compensation from 
senior executives and directors is separate from the authority granted 
to the FDIC as receiver in other sections of Title II to pursue 
recovery from senior executives and directors for losses suffered by a 
failed covered financial company. The FDIC as receiver is not precluded 
from pursuing recovery based on other grants of authority in Title II 
of the Act because it recoups compensation from senior executives and 
directors under Section 210(s).
    Section 380.1 of the Proposed Rule amends the existing Sec.  380.1 
promulgated pursuant to the January 25, 2011 Interim Final Rule to add 
definitions of the terms ``compensation'' and ``director,'' and to 
apply the definition of ``senior executive'' included in Sec.  380.3 of 
the Interim Final

[[Page 16330]]

Rule wherever the phrase ``senior executive'' is used in the Proposed 
Rule and throughout part 380. The definition of the term 
``compensation'' incorporates the definition mandated in section 
210(s)(3) of the Act. The Proposed Rule's definition for the term 
``director'' includes those persons who are in a position to affect the 
activities of the covered financial company and who have a material 
effect on the financial condition of the covered financial company.
Treatment of Fraudulent and Preferential Transfers
    Section 380.9 of the Proposed Rule addresses the powers granted to 
the FDIC as receiver in section 210(a)(11) of the Act to avoid certain 
fraudulent and preferential transfers and seeks to harmonize the 
application of these powers with the analogous provisions of the 
Bankruptcy Code so that the transferees of assets will have the same 
treatment in a liquidation under the Dodd-Frank Act as they would in a 
bankruptcy proceeding.
    There are two areas in which there is a potential for inconsistent 
treatment of transferees under a Title II orderly liquidation as 
compared to a Chapter 7 bankruptcy liquidation. The first issue relates 
to the standard used in determining whether the FDIC as receiver can 
avoid a transfer as fraudulent or preferential under Title II. For 
purposes of this determination, section 210(a)(11)(H)(i)(II) of the Act 
provides that a transfer is made when the transfer is so perfected that 
a bona fide purchaser cannot acquire a superior interest, or if the 
transfer has not been so perfected before the FDIC is appointed as 
receiver, immediately before the date of appointment. This section 
could be read to apply the bona fide purchaser construct to all 
fraudulent transfers and to all preferential transfers pursuant to 
section 210(a)(11)(B) of the Dodd-Frank Act. By contrast, the 
Bankruptcy Code uses the bona fide purchaser construct only for 
fraudulent transfers and for preferential transfers of real property 
other than fixtures. Section 547(e)(1)(B) of the Bankruptcy Code 
provides that in the case of preferential transfers of personal 
property and fixtures, a transfer occurs at the time the transferee's 
interest in the transferred property is so perfected that a creditor on 
a simple contract cannot acquire a judicial lien \16\ that is superior 
to the interest of the transferee. This section of the Proposed Rule 
makes clear that under section 210(a)(11)(H) of the Dodd-Frank Act, the 
FDIC could not, in a proceeding under Title II, avoid as preferential 
the grant of a security interest perfected by the filing of a financing 
statement in accordance with the provisions of the Uniform Commercial 
Code or other non-bankruptcy law where a security interest so perfected 
could not be avoided in a case under the Bankruptcy Code.
---------------------------------------------------------------------------

    \16\ The term ``judicial lien'' is defined in section 101(36) of 
the Bankruptcy Code as a lien obtained by judgment, levy, 
sequestration or other legal or equitable process or proceeding. A 
similar, but abbreviated, formulation is found in section 
547(e)(1)(B) of the Bankruptcy Code.
---------------------------------------------------------------------------

    The second issue relates to the 30-day grace period, provided in 
section 547(e)(2) of the Bankruptcy Code, in which a security interest 
in transferred property may be perfected after such transfer has taken 
effect between the parties. Section 547(e)(2) of the Bankruptcy Code 
generally states that a transfer of property is made (i) when the 
transfer takes effect between the transferor and the transferee, if the 
transfer is perfected at or within 30 days after that time (or within 
30 days of the transferor receiving possession of the property, in the 
case of certain purchase money security interests), (ii) when the 
transfer is perfected, if the transfer is perfected after the 30-day 
period, or (iii) if such transfer is not perfected before the later of 
the commencement of the bankruptcy case or 30 days after the transfer 
takes effect, immediately before the date when the bankruptcy petition 
is filed. Section 210(a)(11)(H) of the Dodd-Frank Act does not contain 
any express grace period. Consistent with the direction provided in 
section 209 of the Dodd-Frank Act to harmonize the regulations with 
otherwise applicable insolvency law to the extent possible, and to 
facilitate implementation of the avoidable transfer provisions of 
sections 210(a)(11)(A) and (B) of the Dodd-Frank Act, Sec.  380.9 of 
the Proposed Rule includes provisions that would result in the 
following:\17\
---------------------------------------------------------------------------

    \17\ These provisions conform with the letter dated December 29, 
2010 from the FDIC's Acting General Counsel to the Securities 
Industry and Financial Markets Association (``SIFMA'') and the 
American Securitization Forum available on SIFMA's Web site at 
https://www.sifma.org/issues/item.aspx?id=22820.
---------------------------------------------------------------------------

     The avoidance provisions in section 210(a)(11) would apply 
the bona fide purchaser construct only in the case of fraudulent 
transfers under subparagraph (A) thereof and preferential transfers of 
real property (other than fixtures) under subparagraph (B) thereof;
     The avoidance provisions in section 210(a)(11)(B) would 
apply the ``hypothetical lien creditor'' construct as applied under 
section 547(e)(1)(B) of the Bankruptcy Code to any preferential 
transfers of personal property and fixtures; and
     the avoidance provisions in section 210(a)(11)(B) would 
apply the 30-day grace period as provided in section 547(e)(2) of the 
Bankruptcy Code, including any exceptions or qualifications contained 
therein.

Subpart A--Priorities

    The Proposed Rule adds a Subpart A consisting of Sec. Sec.  380.20-
26 relating to the priorities of expenses and unsecured claims in the 
receivership of a covered financial company. Subpart A integrates all 
of the various provisions of the Dodd-Frank Act that determine the 
nature and priority of payments. First, the Subpart integrates the 
various statutory references to administrative expenses throughout the 
Act including identification of claims for amounts due to the United 
States, to ensure consistent application of those provisions. Second, 
the Subpart confirms the statutory preference for claims arising out of 
the loss of setoff rights over other general unsecured creditors if the 
loss of the setoff is due to the receiver's sale or transfer of an 
asset. Third, the Proposed Rule clarifies the payment of obligations of 
bridge financial companies and the rights of receivership creditors to 
remaining value. Finally, the Proposed Rule provides for the payment of 
post-insolvency interest on claims and for the determination of the 
index by which the limit applicable to certain claims for wages and 
benefits will be increased.
    Subpart A of the Proposed Rule organizes and clarifies provisions 
throughout Title II of the Dodd-Frank Act dealing with the relative 
priorities of various creditors with claims against a failed financial 
company. These various provisions are based on the fundamental 
principle that any orderly liquidation should fairly treat similarly 
situated creditors and should ensure that the ultimate risk of loss for 
a failure of a systemically important financial company rests with the 
stockholders of the failed company. Although tools were put into place 
to ensure that temporary financing would be available to facilitate an 
orderly liquidation of the company to preserve its going concern value 
and to avoid cost-increasing disruptions of operations, the Dodd-Frank 
Act's resolution regime makes clear that there will be no more 
bailouts.
    The responses to the request for broad comments in the October 19, 
2010 Notice of Proposed Rulemaking raised a number of issues regarding 
the priorities of expenses and unsecured claims in a covered financial 
company receivership. Among the suggestions for future

[[Page 16331]]

rulemakings, the topic of priorities of claims appeared often. One 
specific topic raised by several commenters included section 
210(a)(12)(F) of the Dodd-Frank Act regarding the priority for 
creditors who are deprived of setoff rights. Another was the treatment 
of post-solvency interest, particularly with respect to oversecured 
creditors. Other comments requested that the FDIC clarify the 
relationship between a bridge financial company and creditors of the 
covered financial company. Subpart A of the Proposed Rule addresses 
these and other issues with respect to priorities. Other suggestions 
will be taken up in future rulemakings, and further comments are 
solicited in response to this Notice of Proposed Rulemaking.
Definitions
    Section 380.20 of the Proposed Rule contains a definition of the 
term ``allowed claim'' which is used throughout Subpart A to mean a 
claim in the amount allowed by the FDIC as receiver in accordance with 
the procedures established in Subpart B of the Proposed Rule, or as 
determined by the final order of a court of competent jurisdiction. 
Definitions that apply throughout part 380 are found in Sec.  380.1, 
including the definitions of ``senior executive'' (previously included 
in Sec.  380.3), ``compensation,'' and ``director.''
Priority of Unsecured Claims
    Section 380.21 lists each of the eleven priority classes of claims 
established under the Dodd-Frank Act in the order of its relative 
priority. In addition to the specified priorities listed in section 
210(b), the Proposed Rule integrates additional levels of priority 
established under section 210(c)(13)(d) (certain post-receivership 
debt); section 210(a)(13) (claims for loss of setoff rights); and 
section 210(a)(7)(D) (post insolvency interest). In order, the eleven 
classes of priority of claims are as follows:
    (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 (1) 
Distributions on account of equity to shareholders and other equity 
participants in the covered financial company.
    Paragraph (b) of Sec.  380.21 conforms the method of adjusting 
certain payments for inflation to the similar provisions of the 
Bankruptcy Code. Paragraph (c) provides that each class will be paid in 
full before payment of the next priority, and that if funds are 
insufficient to pay any class of creditors, the funds will be allocated 
among creditors in that class, pro rata.
    This Proposed Rule establishes the general rule for the priority of 
claims of different classes of creditors. The Dodd-Frank Act provides 
for limited exceptions to this general rule of similar treatment for 
similarly-situated creditors, and any exception to the priorities 
established by this section must meet the statutory grounds for such an 
exception and the related regulations, including Sec.  380.2 of this 
part.
Administrative Expenses
    There are several references throughout the Act to the 
administrative expenses of the receiver. In section 201(a)(1) of the 
Dodd-Frank Act, the term is defined as including both ``the actual, 
necessary costs and expenses'' incurred by the receiver in liquidating 
a covered financial company, as well as ``any obligations'' that the 
FDIC as receiver determines are ``necessary and appropriate to 
facilitate the smooth and orderly liquidation of the covered financial 
company.'' Section 210(b)(2) of the Dodd-Frank Act provides that the 
receiver may grant first priority administrative expense status to 
unsecured debt obtained by the receiver in the event that credit is not 
otherwise available from commercial sources. Administrative expense 
priority is given to debt incurred by the FDIC as receiver in enforcing 
an existing contract to extend credit to the covered financial company 
under section 210(c)(13)(D). The Act also expressly confers 
administrative expense status on claims for payment for services 
performed under a service contract of the covered financial company 
after appointment of the receiver (Sec.  210(c)(7)(B)(ii)) and for 
payment of ongoing contractual rent for leases under which the covered 
financial company is lessee (Sec.  210(c)(4)) in harmony with 
bankruptcy practice as well as current practice under the FDI Act. In 
addition, pursuant to section 211(d)(4) of the Dodd-Frank Act, the 
expenses of the Inspector General of the FDIC incurred in connection 
with the conduct of an investigation of the liquidation of any covered 
financial company shall be funded as an administrative expense of the 
receiver of that covered financial company. Section 210(a)(15) of the 
Dodd-Frank Act expressly provides that damages for breach of a contract 
``executed or approved'' by the FDIC as receiver for a covered 
financial company shall be paid as an administrative expense. 
Subparagraph 380.22(a)(3) clarifies that the phrase ``executed or 
approved'' includes only (i) contracts that are affirmatively entered 
into by the FDIC as receiver in writing after the date of its 
appointment, or (ii) contracts that pre-date the appointment of the 
FDIC as receiver that have been expressly approved in writing by the 
receiver. Damages for breach of a pre-receivership contract cannot 
attain administrative expense priority merely by the inaction of the 
receiver, such as the absence of a formal repudiation. Similarly, a 
contract inherited by the FDIC as receiver will not be deemed to have 
been approved based upon an alleged course of conduct by the receiver. 
Affirmative action by the receiver by formally approving the contract 
in writing is the prerequisite for administrative expenses treatment of 
damages for breach of a contract entered into by the covered financial 
company prior to appointment of the receiver.
    In addition to consolidating all of these statutory references to 
the administrative expenses of the receiver into a single rule, 
proposed Sec.  380.22(a) makes clear that expenses of the receiver that 
are necessary and appropriate to facilitate a smooth and orderly 
liquidation may be incurred by the FDIC pre-failure as well as after 
the appointment of the FDIC as receiver, and that all such expenses are 
administrative expenses of the receiver. The inclusion of both pre-
failure and post-failure administrative expenses under the same 
standard is consistent with the treatment of administrative expenses 
under the FDI Act. See 12 CFR 360.4. In a bankruptcy case, the pre-
petition expenses of preparing a petition must be paid prior to filing 
or await confirmation. All fees, compensation and expenses of 
liquidation and

[[Page 16332]]

administration shall be fixed by the FDIC. Such fees, compensation and 
expenses include amounts that the Corporation charges the receivership 
for services rendered by the FDIC.
Amounts Owed to the United States
    Section 210(b)(1)(B) of the Dodd-Frank Act establishes a priority 
class for ``amounts owed to the United States'' immediately following 
the priority class for ``administrative expenses of the receiver.'' 
Section 380.23 of the Proposed Rule establishes a definition for the 
phrase ``amounts owed to the United States'' and makes clear that it 
includes amounts advanced by the Department of Treasury or by any other 
department, agency or instrumentality of the United States, whether 
such amounts are advanced before or after the appointment of the 
receiver. For the sake of clarity, in addition to expressly listing 
advances by the FDIC for funding the orderly liquidation of the covered 
financial company pursuant to section 204(d)(4) as amounts owed to the 
United States, the Proposed Rule also expressly includes other sums 
advanced by departments, agencies and instrumentalities of the United 
States such as amounts owed to the FDIC for payments made pursuant to 
guarantees including payments to satisfy any guarantee of debt under 
the FDIC's Temporary Liquidity Guarantee Program, 12 CFR part 370, as 
well as unsecured accrued and unpaid taxes owed to the United States. 
Unsecured claims for net realized losses by a Federal reserve bank also 
are included, consistent with the mandate under section 1101 of the Act 
that requires such advances to have the same priority as amounts due to 
the United States Department of Treasury. The Dodd-Frank Act does not 
similarly specifically include government-sponsored entities such as 
FNMA, FHMLC or Federal Home Loan Banks, and the regulation therefore 
does not provide that obligations to those entities would be among the 
class of claims included among amounts owed to the United States under 
subsection 380.21(a)(3).
    Although section 204(d)(4) of the Dodd-Frank Act provides that the 
FDIC has the power to take liens upon assets of the covered financial 
company to secure advances and guarantees made under that section, and 
provides that such advances will be repaid as administrative expenses 
``as appropriate,'' the Proposed Rule makes clear that the FDIC will 
treat all such amounts as amounts owed to the United States payable at 
the level of priority immediately following administrative expenses. 
This priority will apply regardless of whether or not such advance is 
treated as debt or equity on the books of the covered financial 
company. It will also apply whether or not such advance is secured by a 
lien under section 204(d)(4) in recognition of the FDIC's authority to 
impose assessments under section 210(o), which effectively guarantees 
repayment of such advances whether or not they are secured. Similarly, 
although the statute permits a distinction between advances for the 
purpose of funding administrative expenses (which are repayable at the 
administrative expense priority level) and other advances that are 
repaid as amounts owed to the United States, there will be little 
practical difference in the treatment of obligations for amounts 
advanced under section 204(d) of the Act because the power to impose 
additional assessments under section 210(o) assures that these amounts 
always will be repaid, thereby rendering unnecessary the need to track 
the actual use of such advances. As a practical matter, the only 
potential difference in the payment of a claim at the administrative 
expense priority under Sec.  380.21(a)(2) and a claim at the priority 
class level for amounts owed to the United States under Sec.  
380.21(a)(3) would be the timing of the payment, and that potential 
differential would be addressed by the payment of interest at the post-
insolvency rate as described in Sec.  380.25.
    Section 380.23(b) acknowledges that the United States may consent 
to subordination of its right to repayment of any specified debt or 
obligation provided that all unsecured claims of the United States 
shall, at a minimum, have a higher priority than equity or other 
liabilities of the covered financial company that count as regulatory 
capital. This is consistent with the mandatory requirement of section 
206 of the Dodd-Frank Act that the shareholders of a covered financial 
company shall not receive payment until after all other claims are 
fully met.
Setoff
    Section 210(a)(12) of the Dodd-Frank Act permits a creditor to 
offset certain qualified mutual debts between the covered financial 
company and the creditor. To allow the FDIC as receiver the flexibility 
to maximize the return from the disposition of assets of the covered 
financial company and to transfer assets to a bridge financial company 
so as to preserve the going concern value of the company, the Dodd-
Frank Act specifically empowers the receiver to transfer assets of a 
covered financial company ``free and clear of the setoff rights of any 
third party.'' Section 380.24 of the Proposed Rule addresses the claims 
of creditors who have lost a right of setoff due to the exercise of the 
receiver's right to sell or transfer assets of the covered financial 
company free and clear. Normally, a transfer of the assets without the 
claim will prevent setoff because the transfer destroys the mutuality 
of obligations that is the prerequisite of any ability to offset a 
claim directly against an obligation. The Dodd-Frank Act includes 
section 210(a)(12)(F) to provide a claimant with a preferred recovery 
as a general creditor and, thereby, achieve comparable protection. In 
the Proposed Rule, Sec.  380.24 ensures that the claim of a creditor 
based upon the loss of an otherwise valid right of setoff due to a 
transfer of assets of the receiver will be paid at the level of 
priority immediately prior to all other general unsecured creditors.
    Under the Dodd-Frank Act, the receiver is expressly authorized to 
sell assets free and clear of setoff claims, and the resulting claim 
for loss of those rights is expressly given a priority above other 
general unsecured creditors--but below administrative claims, amounts 
owed to the United States and certain employee-related claims. This 
preferential treatment should normally provide value to setoff 
claimants equivalent to the value of setoff under the Bankruptcy Code. 
While in bankruptcy setoff claims are functionally treated similarly to 
a security interest, the Bankruptcy Code treatment would severely 
impair the FDIC's ability to transfer assets of the covered financial 
company for value. The provisions of the Dodd-Frank Act and the 
implementing provisions in the Proposed Rule do provide adequate 
protection for the claimant in the context of the necessity for prompt 
transfer of the underlying asset. The Proposed Rule establishes that 
the FDIC as receiver will pay claimants for their loss of setoff rights 
in accordance with the express provisions of the Dodd-Frank Act.
Post-Insolvency Interest
    Section 380.25 of the Proposed Rule establishes a post-insolvency 
interest rate, as required by section 210(a)(7)(D) of the Dodd-Frank 
Act. That rate is based on the coupon equivalent yield of the average 
discount rate set on the three-month U.S. Treasury Bill. Post-
insolvency interest is computed quarterly and is not compounded. This 
is the rate that has been used by the FDIC in connection with claims 
under the FDI Act, and the same rate was chosen for the Dodd-Frank Act 
for ease of administration. In contrast, the

[[Page 16333]]

Bankruptcy Code provides in section 726(a)(5) for post-petition 
interest at the ``legal rate;'' however, in interpreting this 
provision, bankruptcy courts have not established a uniform post-
petition interest rate. For the purpose of uniform treatment, the 
Proposed Rule computes post-insolvency interest in the same manner as 
provided for under the FDI Act pursuant to 12 CFR 360.7.
    The Proposed Rule makes it clear that the post-insolvency interest 
is applied to the entire claim amount, which may include pre-
receivership interest. In addition, if the claim is for damages arising 
out of repudiation of an obligation, the claim amount may include 
interest through the date of repudiation as required under section 
210(c)(3)(D) of the Act. The Dodd-Frank Act does not contain a 
provision similar to section 506(b) of the Bankruptcy Code allowing 
interest at the contract rate and certain fees and expenses to be paid 
to oversecured creditors to the extent of the value of their 
collateral. Comment is sought on whether this is an area in which the 
FDIC should seek to harmonize orderly resolution practice with the 
Bankruptcy Code.
Transfers to Bridge Fi