Certain Orderly Liquidation Authority Provisions under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 41626-41647 [2011-17397]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 76, Number 136 (Friday, July 15, 2011)]
[Rules and Regulations]
[Pages 41626-41647]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17397]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 380


Certain Orderly Liquidation Authority Provisions under Title II 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act

AGENCY: Federal Deposit Insurance Corporation (``FDIC'').

ACTION: Final rule.

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SUMMARY: The FDIC is issuing a final rule (``Final Rule'') to 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''). The 
Final Rule will establish a more comprehensive framework for the 
implementation of the FDIC's orderly liquidation authority and will 
provide greater transparency to the process for the orderly liquidation 
of a systemically important financial institution under the Dodd-Frank 
Act.

DATES: The effective date of the Final Rule is August 15, 2011.

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

SUPPLEMENTARY INFORMATION:

I. Background

    The Dodd-Frank Act (Pub. L. 111-203, 12 U.S.C. 5301 et seq., July 
21, 2010) was enacted on July 21, 2010. Title II of the Act provides 
for the appointment of the FDIC as receiver of a nonviable financial 
company that poses significant risk to the financial stability of the 
United States (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 a covered financial company following the FDIC's 
appointment as receiver and provides for additional implementation of 
the orderly liquidation authority by rulemaking. The Final Rule is 
being promulgated pursuant to 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 210(s)(3), 
which directs the FDIC to promulgate regulations to implement the 
requirements of the Act with respect to recoupment of compensation from 
senior executives or directors materially responsible for the failed 
condition of a covered financial company, which regulation is required 
to include a definition of the term ``compensation;'' section 
210(a)(7)(D), with respect to the establishment of a post-insolvency 
interest rate; and section 210(b)(1)(C)-(D), with respect to the index 
for inflation applied to certain employee compensation and benefit 
claims. 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 so 
that stakeholders may plan transactions going forward.

[[Page 41627]]

    The Final Rule represents a culmination of an initial phase of 
rulemaking under Title II of the Dodd-Frank Act with respect to the 
implementation of its authority to undertake the orderly liquidation of 
a covered financial company. On October 19, 2010, the FDIC published in 
the Federal Register a notice of proposed rulemaking (75 FR 64173, 
October 19, 2010). Following consideration of comments received, that 
proposed rule was implemented as an Interim Final Rule (``IFR'') issued 
on January 25, 2011, and was codified at 12 CFR part 380, consisting of 
Sec. Sec.  380.1-380.6 (76 FR 4207, January 25, 2011). The IFR 
addressed discrete topics that were critical for initial guidance for 
the financial industry, including the payment of similarly situated 
creditors, the honoring of personal service agreements, 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 a covered subsidiary of an insurance company. The FDIC requested 
additional general comments on the IFR as well as comments relating to 
specific provisions. The comment period for the IFR ended on March 28, 
2011.
    On March 15, 2010, the FDIC issued a notice of proposed rulemaking 
covering additional subjects pertinent to an orderly liquidation under 
Title II of the Act (76 FR 16324, March 23, 2011). The purpose of the 
proposed rule (the ``Proposed Rule'') that was the subject of this 
second notice was to continue to build on the framework initially begun 
with the IFR. The Proposed Rule addressed the recoupment of 
compensation from senior executives and directors of a covered 
financial company; further clarified the definition of ``financial 
company'' in section 201 of the Dodd-Frank Act by detailing what it 
means to be ``predominantly engaged in activities that are financial or 
incidental thereto;'' clarified the receiver's powers to avoid 
fraudulent and preferential transfers by a covered financial company; 
addressed the order of priority for the payment of claims, which 
included clarifying the meaning of ``administrative expenses'' and 
``amounts owed to the United States,'' the priority for setoff claims, 
how post-insolvency interest is to be paid, the payment of claims for 
contracts and agreements expressly assumed by a bridge financial 
company; and addressed the receivership administrative claims process, 
including the treatment of secured claims. The notice of proposed 
rulemaking published in the Federal Register requested comments on all 
aspects of the Proposed Rule as well as comments relating to specific 
provisions. The comment period ended May 23, 2011.

II. Summary of Comments on the IFR and the Proposed Rule

    The FDIC received 10 comments in response to the IFR and 21 
comments in response to the Proposed Rule. Almost all of the comments 
were submitted by financial industry trade associations, with others 
submitted by insurance trade associations, clearing and settlement 
companies, a foundation for research and advocacy, a committee of 
bankruptcy attorneys, a group of law and business school faculty, and a 
group of law school students.
    The general themes of comments that did not directly relate to the 
text of the IFR and Proposed Rule were wide-ranging. Commenters 
simultaneously urged prompt and comprehensive rulemaking to increase 
transparency with respect to the implementation of the orderly 
liquidation authority and certainty in the implementation of ongoing 
and future financial transactions, while counseling a deliberate pace 
to allow input from industry representatives and the benefit of the 
review of resolution plans prior to the implementation of rules 
governing the orderly liquidation process.
    Many comments urged the greatest possible harmony with bankruptcy 
laws, rules and processes. These comments sought, among other things: 
Increased input from creditors and creditor committees, deference to 
bankruptcy case law, adoption of bankruptcy reporting processes, and 
earlier and broader judicial input and review. In this connection, 
comments requested greater clarity with respect to the procedures that 
the FDIC will follow in determining claims and valuations of collateral 
and assets, as well as an appeals procedure for disputed valuations of 
property. Commenters also urged clarification with respect to the 
implementation of the so-called ``Chapter 7 minimum'' payment to 
creditors pursuant to section 210(a)(7)(B) of the Act.\1\
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    \1\ Section 210(a)(7)(B) provides that ``a creditor shall, in no 
event, receive less than the amount that such creditor is entitled 
to receive'' under a chapter 7 liquidation of such covered financial 
company in bankruptcy.
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    Commenters from the insurance industry similarly urged the greatest 
possible deference to state regulators and to state laws, rules and 
regulations governing insurance companies. One commenter has repeatedly 
requested clarification that mutual insurance holding companies will be 
treated as insurance companies for the purposes of the Dodd-Frank Act.
    Comments emphasized the importance of maximizing the going concern 
value of the business and assets of the covered financial company and 
suggested establishment of standards for the conduct of sales of assets 
and collateral. A specific concern was the need for clarification of 
the treatment of custodial assets held by non-banks in an orderly 
liquidation.
    Another broad theme was the importance of clarifying the process 
and criteria for designating systemically important financial companies 
that may be subject to orderly liquidation. These comments generally 
sought to limit the scope of such a designation. In addition to general 
comments on this theme, one commenter took the position that money 
managers should never be considered systemically important. Another 
commenter took the same position with respect to money funds. 
Additional clarification also was sought with respect to the process 
for the designation of covered financial companies and the appointment 
of the receiver.
    The implementation of special assessments and the clawback of 
preferential payments made to similarly situated creditors has been a 
recurring theme in comments to the IFR and the Proposed Rule. 
Commenters sought clarity with respect to the designation of 
preferential payments deemed necessary to essential operations that are 
exempt from the clawback under section 210(o) of the Dodd-Frank Act. 
Other comments urged restraint in making preferential payments and 
suggested additional procedural safeguards with respect to this 
process. Comments also urged careful consideration of any need for 
special assessments on the industry to avoid undue burden on well-run 
companies.
    Commenters requested additional clarification of the implementation 
of the authority to create bridge financial companies, including the 
processes and procedures for creating and terminating bridge financial 
companies, the treatment of assets transferred to bridge financial 
companies, and the treatment of claims against bridge financial 
companies. One commenter suggested a rule clarifying that all qualified 
financial contracts will be transferred to a bridge financial company.
    Commenters also expressed concern about the process for resolving 
an

[[Page 41628]]

international financial company and stressed the need for international 
cooperation and coordination.
    Finally, one commenter argued that the IFR and the Proposed Rule 
are unconstitutionally broad and usurp the legislative function 
constitutionally delegated to Congress.
    Comments beyond the scope of the IFR and the Proposed Rule will be 
considered in connection with future rulemakings. Comments relating to 
specific provisions of the IFR and Proposed Rule are discussed below in 
the analysis of the relevant sections of the Final Rule.

III. The Final Rule

A. Overview

    The Final Rule will divide Part 380 into subparts A, B, and C. In 
subpart A, Sec.  380.1 provides definitions of general applicability in 
part 380. Section 380.3 provides that services rendered by employees to 
the covered financial company after the FDIC has been appointed as 
receiver, or during the period where some or all of the operations of 
the covered financial company are continued by a bridge financial 
company, will be compensated according to the terms and conditions of 
any applicable personal service agreements and that such payments will 
be treated as an administrative expense. Section 380.5 provides that if 
the FDIC acts as receiver for a direct or indirect subsidiary of an 
insurance company and that subsidiary is not an insured depository 
institution or an insurance company itself, the value realized from the 
liquidation of the subsidiary will be distributed according to the 
order of priorities set forth in the Dodd-Frank Act. Section 380.6 
provides that the FDIC will avoid taking a lien on some or all of the 
assets of a covered financial company that is an insurance company or a 
subsidiary that is an insurance company unless it determines that 
taking such a lien is necessary for the orderly liquidation of the 
covered financial company and will not unduly impede or delay the 
liquidation or rehabilitation of the insurance company or the recovery 
by its policyholders. Section 380.7 provides that the FDIC as receiver 
of a covered financial company may recover from senior executives and 
directors who were substantially responsible for the failed condition 
of the covered financial company any compensation they received during 
the two-year period preceding the date on which the FDIC was appointed 
as receiver, or for an unlimited period in the case of fraud.
    The Proposed Rule included Sec.  380.8, implementing section 201(b) 
of the Act. Section 201(b) of the Act requires the FDIC, in 
consultation with the Secretary of the U.S. Treasury, to establish by 
regulation criteria for determining, for the purposes of Title II, if a 
company is predominantly engaged in activities that are financial in 
nature or incidental thereto as determined by the Board of Governors of 
the Federal Reserve System (``Board of Governors'') under section 4(k) 
of the Bank Holding Company Act (``BHC Act''). A company that is 
predominantly engaged in such activities is a ``financial company'' 
under Title II (unless expressly excluded by section 201(a)(11)(C) of 
the Act) and may be subject to the orderly liquidation provisions of 
the Dodd-Frank Act. On February 11, 2011, the Board of Governors 
published a notice of proposed rulemaking entitled ``Definitions of 
`Predominantly Engaged in Financial Activities' and `Significant' 
Nonbank Financial Company and Bank Holding Company'' (76 FR 7731, 
February 11, 2011) (``Board of Governors' NPR'').
    The Board of Governors' NPR proposed criteria for determining 
whether a company is ``predominantly engaged in financial activities'' 
for purposes of determining if the company is a nonbank financial 
company under Title I of the Act. There are substantial similarities 
between the provisions in Title I of the Act, which the Board of 
Governors' NPR implements, and section 201(b) of the Act, which Sec.  
380.8 of the FDIC's Proposed Rule would implement. In light of those 
similarities, the FDIC staff coordinated with the staff of the Board of 
Governors, to the extent practicable, on the proposed criteria in Sec.  
380.8. The FDIC staff is continuing to coordinate with the staff of the 
Board of Governors on this issue and intends to finalize the criteria 
for determining if a company is predominantly engaged in activities 
that are financial in nature or incidental thereto through a separate 
notice in the Federal Register. Consequently, Sec.  380.8 is reserved 
in the Final Rule.
    Section 380.9 in subpart A clarifies the interpretation of 
provisions of the Act authorizing the FDIC as receiver of a covered 
financial company to avoid fraudulent or preferential transfers in a 
manner comparable to the relevant provisions of the Bankruptcy Code so 
that transferees will have the same treatment in a liquidation under 
the Act as they would have in a bankruptcy proceeding.
    Subpart B of the Final Rule addresses the priorities for expenses 
of the receiver of a covered financial company and other unsecured 
claims against the covered financial company or the receiver. Subpart B 
integrates and harmonizes the various provisions of the Dodd-Frank Act 
that determine the nature and priority of payments. In particular, the 
subpart integrates the various statutory references to administrative 
expenses throughout the Act. It also provides additional context with 
respect to the definition of ``amounts owed to the United States'' to 
clarify that unsecured obligations advanced to provide funds for the 
orderly liquidation of a covered financial company or to avoid or 
mitigate adverse effects on the financial stability of the United 
States in the liquidation of the covered financial company are included 
among the class of claims paid at the higher statutory level accorded 
to amounts owed to the United States, while unsecured obligations to 
the United States that were incurred by the covered financial company 
in the ordinary course of its business prior to the appointment of the 
receiver will be paid at the priority of general unsecured or senior 
liabilities of the covered financial company. Additionally, subpart B 
confirms the statutory treatment of claims arising out of the loss of 
setoff rights at a priority ahead of other general unsecured creditors 
if the loss of the setoff is due to the receiver's sale or transfer of 
an asset, finalizes the methodology for calculating post-insolvency 
interest on unsecured claims and clarifies the payment of obligations 
of bridge financial companies and the rights of receivership creditors 
to any remaining value upon termination of a bridge financial company. 
For a more logical organizational flow, subpart B also now includes at 
Sec.  380.27 the rule originally found at Sec.  380.2 of the IFR, 
clarifying that the FDIC will not use its discretion to differentiate 
among similarly situated creditors under section 210 of the Act to give 
preferential treatment to certain long-term senior debt with a term 
longer than 360 days, and that subordinated debt and equity never will 
qualify for preferential treatment.
    Subpart C sets forth the administrative process for the 
determination of claims against a covered financial company as 
established by relevant provisions of the Dodd-Frank Act. This process 
will not apply to any liabilities or obligations assumed by a bridge 
financial company or other entity or to any extension of credit from a 
Federal reserve bank or the FDIC to a covered financial company. Under 
the claims procedures, the receiver will publish and mail a notice

[[Page 41629]]

to advise creditors to file their claims by a bar date that is not less 
than 90 days after the date of the initial publication. The receiver 
will have up to 180 days to determine whether to allow or disallow the 
claim, subject to any extension agreed to by the claimant. The claimant 
will have 60 days from the earlier of any disallowance of the claim or 
the end of the 180-day period (or any period extended by agreement) to 
file a lawsuit in federal court for a judicial determination. No court 
has jurisdiction over any claim, however, unless the claimant has 
exhausted its administrative remedies through the claims process.
    Subpart C also includes provisions concerning contingent claims and 
secured claims. With respect to claims based on a contingent obligation 
of a covered financial company, the receiver will estimate the value of 
the contingent claim at the end of either the 180-day claim 
determination period or any extended period agreed to by the claimant. 
If the claim becomes fixed before it has been estimated, it may be 
allowed in the fixed amount; otherwise, the estimated value will be 
used to calculate the claimant's pro rata distribution. With respect to 
secured claims, subpart C provides that property of a covered financial 
company that secures a claim will be valued at the time of the proposed 
use or disposition of the property. Secured claimants may request the 
consent of the receiver to obtain possession of or exercise control 
over their collateral. The Final Rule provides that the receiver will 
grant consent unless it decides to use, sell or lease the property, in 
which case it must provide adequate protection of the claimant's 
security interest in the property. This provision will not apply in a 
case where the receiver repudiates or disaffirms a secured contract, 
however.

B. Summary of Changes From the IFR and the Proposed Rule

    The Final Rule contains substantive revisions and technical 
corrections to the provisions of the IFR and the Proposed Rule 
responsive to the comments received. The changes are discussed in more 
detail in the section-by-section analysis of the Final Rule. In 
summary, the substantive revisions in the Final Rule are as follows:
    (1) In the Proposed Rule, Sec.  380.2(c) provided that collateral 
securing claims against the covered financial company would be valued 
as of the date of the appointment of the receiver. This provision has 
been moved to Sec.  380.50(b) of the Final Rule, which states that such 
property will be valued at the time of the proposed use or disposition 
of the property. This approach to the valuation of collateral follows 
the comparable provision of the Bankruptcy Code.
    (2) Section 380.4 of the IFR concerning contingent claims has been 
moved to Sec.  380.39 of the Final Rule. The original text of this 
section has been retained and new provisions have been added to provide 
that the receiver will estimate the value of a contingent claim no 
later than 180 days after the claim is filed or any extended period 
agreed to by the claimant.
    (3) Section 380.7 addresses the recoupment of compensation from 
former and current senior executives and directors who are 
substantially responsible for the failed condition of the covered 
financial company. The Proposed Rule provided a standard of conduct in 
which, among other things, a senior executive or director would be 
deemed ``substantially responsible'' if he or she failed to conduct his 
or her responsibilities with the requisite degree of skill and care 
required by that position. The Final Rule clarifies the standard and 
provides that a senior executive or director would be deemed 
``substantially responsible'' if he or she failed to conduct his or her 
responsibilities with the degree of skill and care an ordinarily 
prudent person in a like position would exercise under similar 
circumstances. The revision clarifies that the standard of care that 
will trigger section 210(s) is a negligence standard; a higher 
standard, such as gross negligence, is not required. The Final Rule was 
also revised to reflect that the FDIC as receiver may commence an 
action to seek recoupment and has a ``savings clause'' to preserve the 
rights of the FDIC as receiver to recoup compensation under all 
applicable laws.
    (4) As discussed, the provision in Sec.  380.8 of the Proposed Rule 
regarding the criteria for determining if a company is predominantly 
engaged in activities that are financial in nature or incidental 
thereto will be the subject of future rulemaking. Section 380.8 is 
reserved in the Final Rule.
    (5) Section 380.21 of the Proposed Rule enumerated the priorities 
of payments to unsecured creditors. A new sentence is added in the 
Final Rule to provide that contractual subordination agreements will be 
respected, which is consistent with the practice in bankruptcy.
    (6) The Proposed Rule contained a definition of ``amounts owed to 
the United States'' that would be entitled to the priority of claims 
immediately following administrative expenses, that included all 
amounts of any kind owed to any department, agency or instrumentality 
of the United States. Under the Final Rule, the definition of ``amounts 
owed to the United States'' in Sec.  380.23 has been revised to clarify 
that the obligations entitled to the priority afforded to ``amounts 
owed to the United States'' include only amounts advanced to the 
covered financial company to promote the orderly resolution of the 
covered financial company or to avoid or mitigate adverse effects on 
the financial stability of the United States in the resolution of the 
covered financial company. Consistent with the goal of the Dodd-Frank 
Act to end any taxpayer bail-out of a nonviable financial company, 
unpaid unsecured federal income tax obligations also are repaid at the 
priority afforded to amounts owed to the United States. In response to 
comments and to provide clearer guidance, this section also sets forth 
a non-exclusive list of included types of advances, and a similar list 
of excluded types of advances. The level of priority afforded to 
amounts owed to the United States is not applicable to administrative 
expenses, which are dealt with in Sec.  380.22, nor to secured 
obligations, which are dealt with in Sec. Sec.  380.50-53 regarding 
secured claims.
    (7) Section 380.24, which addresses the priority granted to 
creditors who have lost setoff rights due to the exercise of the 
receiver's right to sell or transfer assets free and clear of such 
rights, has been modified to make clear that the provisions of that 
section do not affect the provisions of the Dodd-Frank Act relating to 
rights of netting with respect to qualified financial contracts.
    (8) Section 380.31 addresses the scope and applicability of the 
receivership administrative claims process by providing that the claims 
process does not apply to claims against a bridge financial company or 
involving its assets or liabilities, or extensions of credit from a 
Federal reserve bank or the FDIC to a covered financial company.
    (9) Section 380.35(b)(2)(i) of the Final Rule permits the receiver 
to consider a claim filed after the claims bar date if the claimant did 
not have notice of the appointment of the receiver in time to file its 
claim because the claim is based on an act or omission of the receiver 
that occurs after the claims bar date. The Proposed Rule addressed 
claims that did not ``accrue'' until after the claims bar date. It was 
decided, however, that this was too broad because it could cover 
contingent claims, which are addressed in Sec.  380.39 of the Final 
Rule.
    (10) Sections 380.50-380.53 of the Proposed Rule have been 
extensively modified to more fully protect the rights of secured 
claimants. Property of a

[[Page 41630]]

covered financial company will be valued at the time of any proposed 
disposition or use of the property. A secured claimant may request the 
receiver's consent to exercise its rights against its collateral, which 
the receiver will grant unless it decides to use, sell or lease the 
collateral, in which case the receiver must provide adequate protection 
of the claimant's security interest in the property.

C. Section-by-Section Analysis of the Final Rule

1. Subpart A--General and Miscellaneous Provisions
    Definitions. Section 380.1 of the Final Rule contains definitions 
of the following terms of general applicability to part 380: ``allowed 
claim,'' ``Board of Governors,'' ``bridge financial company,'' 
``compensation,'' ``corporation,'' ``covered financial company,'' 
``covered subsidiary,'' ``director,'' ``Dodd-Frank Act,'' ``employee 
benefit plan,'' ``insurance company,'' and ``senior executive.'' Some 
of these terms are terms that are defined in the Act which were not 
included in the IFR or the Proposed Rule, and others had been included 
among the substantive provisions of those rules but are now moved to 
Sec.  380.1 because those terms are, or may be, used on more than one 
occasion throughout part 380. All of the definitions are consistent 
with the language of the Dodd-Frank Act. By and large, definitions that 
had been included in the IFR and the Proposed Rule have not been 
changed. The terms ``Board of Governors,'' ``Dodd-Frank Act'' and 
``employee benefits plan'' were added for ease of reference and the 
avoidance of doubt. A clarifying change was made to the definition of 
``director'' to make clear that the term includes individuals serving 
entities that may have a different legal form than a corporation, such 
as a limited liability company, in a capacity similar to a director for 
a corporation.
    Few comments were received on these definitions. One commenter 
argued that the definition of ``compensation'' should use only the 
precise language of section 210(s)(3) of the Act, and not include any 
additional language. The Proposed Rule provided greater clarity to the 
industry by providing a non-exclusive list of the types of compensation 
that would be subject to recoupment that is consistent with the intent 
of section 210(s). Accordingly, no change to this definition is being 
made in the Final Rule.
    Section 380.2 is reserved; the content of Sec.  380.2 of the IFR 
has been moved to Sec.  380.27 of the Final Rule and is discussed 
below.
    Personal service agreements. Section 380.3 of the Final Rule 
assures that an employee who provides services to the covered financial 
company after appointment of the receiver, or to the bridge financial 
company, will be paid for such services according to the terms of any 
applicable personal service agreement, and such payment shall be 
treated as an administrative expense of the receiver. This provision 
does not restrict the receiver's ability to repudiate a personal 
services agreement, nor does it impair the ability of the receiver to 
negotiate different terms of employment by mutual agreement. Section 
380.3 does not apply to senior executives or directors of a covered 
financial company and it does not limit the power to recover 
compensation previously paid to senior executives or directors under 
section 210(s) of the Dodd-Frank Act and the regulations promulgated 
thereunder.
    Only one comment addressed the treatment of personal service 
agreements under Sec.  380.3 of the IFR. That comment pointed out that 
the reference to covered subsidiaries in the IFR was confusing, because 
covered subsidiaries are, by definition, not in receivership and 
therefore contracts to which the subsidiary is a party cannot be 
repudiated by the FDIC as receiver pursuant to section 210(c) of the 
Act. Section 380.3 of the IFR was intended to address the possibility 
that an agreement entered into by a parent company may cover employees 
of an affiliate or subsidiary of the covered financial company. It is 
the intent of the Final Rule that employees be paid for work performed 
under a contract with a covered financial company or, if applicable, a 
bridge financial company, in accordance with the terms of the agreement 
until such time as the contract is assumed by a third party or 
repudiated by the FDIC as receiver. To the extent that the FDIC as 
receiver for the covered financial company has the power to exercise 
control over a subsidiary, it will ensure that employees of the 
subsidiary continue to be paid in accordance with the personal services 
agreement. However, the reference to covered subsidiaries has been 
deleted from Sec.  380.3 in the Final Rule to clarify that this section 
does not imply that the FDIC as receiver has the power to repudiate a 
contract entered into by a covered subsidiary nor does it have the 
power to enforce the terms of such a contract except by virtue of its 
role as parent to such subsidiary, unless or until the FDIC is 
appointed as receiver of a subsidiary.
    As a technical revision to the IFR, Sec.  380.3 of the Final Rule 
does not include the definition of the term ``senior executive'' as the 
IFR had. The definition of that term has been moved into the general 
definitions of Sec.  380.1. In addition, a reference is included in the 
last sentence of Sec.  380.3(c) to the rule regarding recoupment of 
executive compensation included in this Final Rule at Sec.  380.7.
    Section 380.4 is reserved as the content of that Proposed Rule has 
been moved to Sec.  380.39 and is discussed below.
    Insurance company subsidiaries. The IFR provides at Sec.  380.5 
that where the FDIC acts as receiver for a direct or indirect 
subsidiary of an insurance company, the value realized from the 
liquidation of the subsidiary will be distributed according to the 
priorities established in the Dodd-Frank Act and will be available to 
the policy holders of the parent insurance company. No comments were 
received recommending changes to Sec.  380.5 of the IFR. The sole 
revision to that section in the Final Rule is to include a reference to 
the regulations promulgated under section 210(b)(1) of the Act that are 
included in subpart B of this Final Rule.
    Liens on insurance company assets. Section 380.6 of the IFR limits 
the ability of the FDIC to take liens on insurance company assets and 
assets of the insurance company's covered subsidiaries under certain 
circumstances after the FDIC has been appointed as receiver. As 
discussed in the preamble of the notice of proposed rulemaking with 
respect to this rule, section 204 of the Dodd-Frank Act provides that 
in the event that the FDIC as receiver of a covered financial company 
determines it to be necessary or appropriate, it may provide funding 
for the orderly liquidation of covered financial companies and covered 
subsidiaries by, among other things, making loans, acquiring debt, 
purchasing assets or guaranteeing them against loss, assuming or 
guaranteeing obligations, making payments, or entering into certain 
transactions. In particular, pursuant to section 204(d)(4) of the Dodd-
Frank Act, the FDIC is authorized to take liens ``on any or all assets 
of the covered financial company or any covered subsidiary, including a 
first priority lien on all unencumbered assets of the covered financial 
company or any covered subsidiary to secure repayment'' of any advances 
made.
    Commenters to the IFR questioned the reference to liens on assets 
of an affiliate of a covered financial company as well

[[Page 41631]]

as assets of a covered subsidiary. The FDIC as receiver has clear 
authority under section 204(d)(4) of the Act to take a lien on the 
``assets of the covered financial company or any covered subsidiary to 
secure repayment of any transactions conducted'' under that section. 
While section 203(e) of the Act contemplates that the FDIC could be 
appointed as receiver for an affiliate of an insurance company that is 
not itself a subsidiary, it is clear that upon appointment, the 
affiliate would become a covered financial company, rendering the 
reference to ``affiliates'' in Sec.  380.6 superfluous. The Final Rule 
has been revised accordingly to eliminate the reference to 
``affiliates'' of the covered financial company and to make clear that 
the rule applies only to covered subsidiaries of insurance companies.
    Recoupment of Compensation. Section 380.7 of the Final Rule 
implements section 210(s) of the Dodd-Frank Act, which authorizes the 
FDIC as receiver to recoup compensation when a current or former senior 
executive or director is ``substantially responsible'' for the failed 
condition of a covered financial company. The Final Rule provides, in 
pertinent part, that a senior executive or director would be deemed 
``substantially responsible'' if he or she failed to conduct his or her 
responsibilities with the degree of skill and care required by that 
position. Comments received on Sec.  380.7 of the Proposed Rule sought 
clarification or made recommendations regarding this standard. Some 
comments took the position that substantial responsibility should be 
based on state law or established legal standards. One commenter took 
the position that substantial responsibility should exist based solely 
on the failure of the covered financial company with no inquiry into 
conduct. In response to the comments, the Final Rule clarifies the 
standard and provides that a senior executive or director would be 
deemed ``substantially responsible'' if he or she failed to conduct his 
or her responsibilities with the degree of skill and care an ordinarily 
prudent person in a like position would exercise under similar 
circumstances. The revision clarifies that the standard of care that 
will trigger section 210(s) is a negligence standard; a higher 
standard, such as gross negligence, is not required. In the event that 
a covered financial company is liquidated under Title II, the FDIC as 
receiver will undertake an analysis of whether the individual has 
breached his or her duty of care, including an assessment of whether 
the individual exercised his or her business judgment. The burden of 
proof, however, will be on the former senior executive or director to 
establish that he or she exercised his or her business judgment. State 
``business judgment rules'' and ``insulating statutes'' will not shift 
the burden of proof to the FDIC or increase the standard of care under 
which the FDIC as receiver may recoup compensation.
    The Final Rule provides that, in certain limited circumstances, a 
senior executive or director would be presumed to be substantially 
responsible for the failed condition of the covered financial company. 
Some commenters objected to the use of the rebuttable presumption of 
substantial responsibility that was based on the position or the duties 
of the current or former senior executive or director. Those commenters 
argued that a presumption based solely on an individual's position in a 
company would be a disincentive for any individual to take that 
position and would be detrimental to the financial industry. Other 
commenters objected to the presumption of substantial responsibility 
that was based on an individual's removal from his or her position 
under section 206 of the Act. One commenter argued that the presumption 
exception for ``white knights'' was too narrow and would serve as a 
disincentive for individuals to take positions with financially 
impaired companies. The statutory language of the Dodd-Frank Act 
provides for the recoupment of compensation from current or former 
senior executives or directors of covered financial companies when they 
have not performed their duties and responsibilities. The use of 
rebuttable presumptions for those individuals under the limited 
circumstances described in the Proposed Rule is aligned with the intent 
shown in the statutory language; thus, the presumptions remain 
unchanged in the Final Rule.
    Some comments requested clarification of the procedure that would 
be used for pursuing recoupment of compensation. The FDIC anticipates 
that it will seek recoupment of compensation through the court system 
using a procedure similar to the procedure that it currently uses when 
it seeks recovery from individuals whose negligent actions have caused 
losses to failed financial institutions. In those situations, the FDIC 
as receiver undertakes an investigation to determine if there are 
meritorious and cost-effective claims and, if so, staff requests 
authority to sue from the FDIC Board of Directors or the appropriate 
delegated authority. Similarly, under section 210(s) of the Act, the 
FDIC anticipates that it will investigate whether the statutory 
criteria for compensation recoupment are met and, if so, staff will 
request authorization of a suit for recoupment. The Final Rule reflects 
this procedure by indicating that the FDIC as receiver may file an 
action to seek recoupment of compensation.
    The Final Rule has a ``savings clause'' to preserve the rights of 
the FDIC as receiver to recoup compensation under all applicable laws.
    Treatment of fraudulent and preferential transfers. Section 380.9 
of the Proposed Rule addressed the powers granted to the FDIC as 
receiver in section 210(a)(11) of the Dodd-Frank Act to avoid certain 
fraudulent and preferential transfers and sought 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 Title II as they would in a bankruptcy 
proceeding.
    One commenter noted that Sec.  380.9(b)(2) of the Proposed Rule 
provided that the term ``fixture'' shall be interpreted in accordance 
with federal bankruptcy law, and stated that a bankruptcy court would 
look to applicable non-insolvency law when determining what constitutes 
a fixture. The commenter pointed out that typically under non-
insolvency law, the law of the state in which a fixture is located 
would govern the determination of what constitutes a fixture, and 
suggested that the FDIC need not apply a federal rule to determine what 
a fixture is for preference purposes. By providing in the Proposed Rule 
that the term ``fixture'' is to be interpreted in accordance with 
federal bankruptcy law, it was intended that the term be interpreted in 
the same manner as under federal bankruptcy law. Thus, to the extent 
that bankruptcy courts continue to define ``fixture'' by reference to 
applicable non-insolvency law, including state law, the same analysis 
would be applied to define ``fixture'' under Sec.  380.9. Therefore, 
the provision does not create a new federal rule to define ``fixture,'' 
and no clarifying change to the Final Rule is necessary.
2. Subpart B--Priorities
    Subpart B addresses the priority for expenses and unsecured claims 
established under section 210(b) of the Act. It organizes and clarifies 
provisions throughout the Act dealing with the relative priorities of 
various creditors with unsecured claims against a failed financial 
company.

[[Page 41632]]

    Priorities. 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) of the Act, the Final Rule integrates additional 
levels of priority established under section 210(b)(2) (certain post-
receivership debt); section 210(a)(13) (claims for loss of setoff 
rights); and section 210(a)(7)(D) (post-insolvency interest).
    Section 380.21(b) conforms the method of adjusting certain payments 
for inflation to the similar provisions of the Bankruptcy Code. Section 
380.21(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.
    Section 380.21 of the Final Rule contains four changes from the 
language of the Proposed Rule. The introduction to paragraph (a) now 
uses the defined term ``allowed claims'' for consistency and to clarify 
that this rule applies only to unsecured claims, including the 
unsecured portion of under-secured claims. This change is in response 
to the request of several commenters that this important point be made 
even clearer and more express in recognition of the mandate of section 
210(b)(5) that section 210 of the Act shall not affect a secured claim 
except to the extent that the security is insufficient to satisfy the 
claim. Also, Sec.  380.21(a)(3) was modified to clarify that the class 
of claims for ``amounts owed to the United States'' does not include 
obligations that meet the definition of administrative expenses in 
Sec.  380.22. A corresponding clarification has been made to Sec.  
380.23. A technical change to Sec.  380.21(a)(4) and (5) substitutes 
the word ``within'' for the phrase ``not later than'' to make clear 
that the relevant employees' claims must arise during the time period 
within 180 days before the date of the appointment of the receiver.
    A comment also requested clarification of the impact of contractual 
agreements on priorities. The last sentence of Sec.  380.21(c) is added 
in response to that comment, to make clear that enforceable contractual 
subordination agreements will be respected. This is consistent with 
section 510(a) of the Bankruptcy Code, which provides that 
subordination agreements enforceable under applicable non-bankruptcy 
law will be respected by the trustee in bankruptcy.
    Administrative expenses of the receiver. Section 380.22 of the 
Proposed Rule expanded and clarified the statutory definition of the 
term ``administrative expenses of the receiver'' by consolidating 
various statutory references to administrative expenses in a single 
section and by making clear that administrative expenses of the 
receiver can include costs and expenses incurred by the FDIC prior to 
the appointment as receiver, as well as post-appointment expenses if 
the expenses are necessary and appropriate to facilitate the smooth and 
orderly liquidation of the covered financial company.\2\
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    \2\ Claims for certain expenses incurred in connection with the 
liquidation of a covered broker or dealer that qualify for 
administrative expense priority are not addressed in the Proposed or 
Final Rule because matters relating to the liquidation of a covered 
broker-dealer under section 205(f) of the Act are required to be 
addressed in a separate rule being prepared jointly with the U.S. 
Securities and Exchange Commission.
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    The changes to Sec.  380.22 of the Proposed Rule are intended 
solely to provide clarity. A commenter questioned how expenses of the 
receiver might pre-date the appointment of the receiver. The change to 
``pre- and post-failure costs and expenses of the FDIC in connection 
with its role as receiver'' clarifies that costs incurred in 
anticipation of and preparation for the role as receiver are 
administrative expenses of the receiver. Similarly, comments revealed 
some confusion about debt accorded super-priority status ahead of 
administrative expenses under Sec.  380.21(a)(1) of the Proposed Rule. 
The language of the Final Rule more closely tracks the statutory 
language with respect to debt that qualifies for super-priority status.
    Amounts owed to the United States. Section 380.23 of the Proposed 
Rule established a definition of ``amounts owed to the United States'' 
that are entitled to be paid at the level of priority immediately 
following administrative expenses. It defined that class of claims to 
include amounts advanced by the U.S. Treasury, or by any other 
department, instrumentality or agency of the United States, whether 
such sums are advanced before or after the appointment of the receiver. 
It expressly included advances by the FDIC for funding of the orderly 
liquidation of the covered financial company pursuant to section 
204(d)(4) of the Act but also included other sums advanced by 
departments, agencies and instrumentalities of the United States such 
as payments on FDIC corporate guarantees, including the Temporary 
Liquidity Guarantee Program and unsecured claims for net realized 
losses by a federal reserve bank in connection with loans made under 
section 13(3) of the Federal Reserve Act, 12 U.S.C. 343, and unsecured 
accrued and unpaid taxes owed to the United States.
    Several comments requested clarification with respect to the 
relationship between pre- and post-receivership administrative expenses 
incurred by the FDIC that were described in Sec.  380.22 of the 
Proposed Rule and are included in the administrative expense class of 
claims under Sec.  380.21(a)(2). For the sake of clarity, Sec.  380.23 
of the Final Rule states that amounts owed to the United States do not 
include any amounts included in the administrative expense classes of 
claims at Sec.  380.21(a)(1) and (a)(2).
    All of the comments specifically addressing Sec.  380.23 of the 
Proposed Rule reflected concerns that expressly including amounts owed 
to all ``departments, agencies and instrumentalities'' of the United 
States in the regulatory definition of ``amounts owed to the United 
States'' was vague and potentially overbroad. Clarification was 
requested with respect to specific examples of amounts that might be 
deemed to be included in the broad definition under the Proposed Rule, 
such as amounts owed to the Pension Benefit Guaranty Corporation 
arising out of underfunded pension obligations, amounts owed to the 
Environmental Protection Agency arising out of superfund cleanup 
obligations, and fees payable to the Securities and Exchange Commission 
or other regulatory agencies, to name a few. In the Final Rule, the 
phrase ``departments, agencies and instrumentalities'' of the United 
States found in the Proposed Rule is omitted in favor of the simpler 
statutory reference to the ``United States.'' This change is not 
intended to limit the definition strictly to amounts owed to the U.S. 
Treasury and the Final Rule expressly provides in Sec.  380.23(a) that 
amounts owed to agencies or instrumentalities other than the U.S. 
Treasury for certain purposes will be included as ``amounts owed to the 
United States.''
    Section 380.23(a) adds language to make clear that the priority for 
amounts owed to the United States relates to amounts advanced in 
connection with the purposes and mandates of Title II of the Act, 
namely, to conduct the orderly resolution of a covered financial 
company, to avoid or mitigate adverse consequences to the financial 
stability of the United States arising out of the failure of the 
covered financial company and to ensure that outstanding tax 
obligations to the U.S. Treasury are repaid to protect the taxpayers. 
These include obligations such as advances under the Temporary 
Liquidity Guaranty Program that was created by

[[Page 41633]]

the FDIC to address a systemic liquidity crisis, repayment of the 
amount of any debt owed to a Federal reserve bank related to loans made 
through programs or facilities authorized under the Federal Reserve 
Act, 12 U.S.C. 221 et seq., as well as payment of unpaid unsecured 
federal income tax obligations of the covered financial company.
    Although the language of the Dodd-Frank Act does not elaborate on 
the intent of the phrase ``amounts owed to the United States,'' it is 
clear that it is not intended to include all amounts owed to the United 
States of any kind or nature. The fact that the Act specifically 
mentions the inclusion of some obligations,\3\ suggests that others 
must be excluded, and that it is not the intent of the Act to elevate 
liabilities for unsecured amounts due to government departments, 
agencies or instrumentalities arising in the covered financial 
company's ordinary course of business over other general or senior 
liabilities. Thus, the Final Rule includes a new paragraph (b) to 
establish the general rule that obligations incurred prior to the 
appointment of the receiver that are unrelated to the particular 
mandates of the Dodd-Frank Act will not be included among the class of 
claims described in Sec.  380.21(a)(3). The Final Rule expressly 
provides that unsecured obligations such as any unsecured portion of a 
Federal Home Loan Bank advance or payments due under guarantees from 
government sponsored entities such as the Federal National Mortgage 
Association or the Federal Home Loan Mortgage Corporation are not 
included among ``amounts owed to the United States.'' These exclusions 
were identified in the preamble to the Proposed Rule. Similarly, the 
Final Rule provides that unsecured unpaid filing or registration fees 
due to any federal agency would not be classified as ``amounts owed to 
the United States'' because they are unrelated to the mandates of the 
Dodd-Frank Act. These unsecured amounts would be included among the 
priority class otherwise applicable to such claims under Sec.  
380.21(a)(7).
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    \3\ For example, section 204(d)(4) (funding for orderly 
liquidation), section 210(c)(6)(C) (certain advances from the SIPC 
Fund), and section 1101(a)(6)(E) (net realized losses on certain 
loans by a Federal reserve bank) all are specifically designated as 
receiving the priority for ``amounts owed to the United States.''
---------------------------------------------------------------------------

    New paragraph (a)(5) in Sec.  380.23 was added to clarify that 
government departments, agencies, and instrumentalities may, for 
avoidance of doubt, expressly designate amounts advanced as amounts 
intended to be included as amounts owed to the United States for the 
purpose of the priorities established in Sec.  380.21. Such designation 
would be used in the case of advances to a financial company to avoid 
or mitigate adverse effects on the financial stability of the United 
States or to liquidate a covered financial company.\4\ Any such 
designation would be in writing by the appropriate department, agency 
or instrumentality in a form acceptable to the FDIC.
---------------------------------------------------------------------------

    \4\ Although not expressly stated in this rule, amounts paid to 
customers of a covered broker dealer or to the Securities Investors 
Protection Corporation (SIPC) pursuant to section 205(f) are 
entitled to the same priority as amounts owed to the United States 
pursuant to section 210(b)(6). These issues will be addressed in a 
joint rulemaking with the SEC as required by section 205(h) of the 
Act.
---------------------------------------------------------------------------

    In addition, some commenters requested clarification that the Final 
Rule does not affect the rights of secured creditors. No change to the 
rule is necessary to clarify that point. The priorities established 
under section 210(b) of the Act relate only to unsecured claims and do 
not affect the rights of secured creditors, which are addressed in 
Sec. Sec.  380.50-380.53 of the Final Rule. To underscore this point, 
the reference to ``secured or unsecured'' amounts advanced under 
section 204(d) of the Act in Sec.  380.23(a)(1) of the Proposed Rule 
has been deleted in the Final Rule. Although the text of section 204(d) 
of the Act refers both to the priorities under section 210(b) and to 
taking liens to secure amounts advanced, it is a clearer, more 
consistent approach to treat all secured claims under the rules 
applicable to such claims and not under the priorities applicable to 
unsecured claims.
    Finally, some commenters expressed concern that the definition of 
``amounts owed to the United States'' may have the effect of increasing 
the amount of risk-based assessments that may be charged by the FDIC 
under section 210(o)(1)(B) of the Dodd-Frank Act. That provision 
authorizes and directs the FDIC to impose risk-based assessments on 
eligible financial companies ``if such assessments are necessary to pay 
in full the obligations issued by the [FDIC] to the Secretary [of the 
U.S. Treasury] under [Title II] within 60 months of the date of 
issuance of such obligations.'' The priority of payments applied by the 
receiver in the liquidation of the assets of the covered financial 
company is independent of the assessments imposed by FDIC in its 
corporate capacity in exercising its authority under section 210(o) of 
the Act. While only the obligations that are expressly included in 
section 210(a)(1)(B) of the Act are entitled to the benefit of the 
assessments, this does not constitute a preferential payment to a 
similarly situated creditor because it is imposed pursuant to a 
statutory requirement and cannot be subject to clawback under section 
210(o)(1)(D)(i).
    Paragraph (c) of Sec.  380.23 is unchanged. It acknowledges that 
the United States may subordinate its right to repayment behind any 
class of creditors by express written consent, provided that in any 
event all amounts due to the United States must be paid prior to any 
payment to equity holders of the covered financial company. Absent such 
express written subordination, all amounts owed to the United States 
will be paid at the priority under Sec.  380.21(a)(3), regardless of 
whether they are characterized as debt or equity on the books of the 
covered financial company.
    Claims for loss of setoff rights. Section 380.24 of the Final 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 in a manner consistent 
with the express provisions of the Act. Any claim for the loss of 
setoff rights is given a priority above other general unsecured 
creditors but below administrative claims, amounts owed to the United 
States and certain employee-related claims.
    Several comments to Sec.  380.24 pointed out that the treatment of 
setoff under the Proposed Rule is different from the practice in 
bankruptcy and took issue with the statement in the preamble to the 
Proposed Rule that treatment of setoff claims under the Dodd-Frank Act 
``should normally provide value to setoff claimants equivalent to the 
value of setoff under the Bankruptcy Code.'' These commenters agreed 
with the statement in the preamble that in bankruptcy setoff rights are 
functionally equivalent to a secured claim and pointed out that this is 
a significantly higher place in the preference scheme than the super-
priority general unsecured creditor status that claims arising out of 
loss of setoff rights are granted under the Dodd-Frank Act. In context, 
the quoted sentence points out that it is anticipated that in most 
cases there will be sufficient funds to pay creditors with claims 
arising out of loss of setoff rights in a Title II orderly liquidation, 
Dodd-Frank orderly resolution, not that the outcome is certain to be 
identical under either priority scheme. The Dodd-Frank Act provides 
that a creditor who has 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

[[Page 41634]]

and clear of the claims of third parties pursuant to section 
210(a)(12)(F) is entitled to a claim senior to all unsecured 
liabilities other than those described in section 210(b)(A)-(D) of the 
Act (i.e., immediately behind the class of general unsecured creditors 
and senior liabilities described in Sec.  380.21(a)(7)). The language 
of the Proposed Rule respected this clear expression of intent by the 
legislature, and no change to this language is made in the Final Rule 
with respect to the priority accorded to claims arising from loss of 
setoff rights.
    Commenters also sought clarification that Sec.  380.24 does not 
affect the contractual rights of netting with respect to qualified 
financial contracts that are protected under the Dodd-Frank Act. 
Section 210(c)(8) of the Act provides that qualified financial 
contracts are exempt from provisions of the Act limiting any right to 
offset in certain circumstances. Accordingly, a new paragraph (c) was 
added to Sec.  380.24 in the Final Rule to clarify that the provisions 
of this section are not intended to disturb such rights with respect to 
qualified financial contracts. If a qualified financial contract is 
subject to a master agreement, such master agreement will be treated as 
a single agreement as provided in section 210(c)(8)(D)(viii).
    Post-insolvency interest. Section 380.25 of the Final Rule 
establishes a post-insolvency interest rate, as required by section 
210(a)(7)(D) of the Dodd-Frank Act. That rate is based upon the coupon 
equivalent yield of the average discount rate set on the three-month 
U.S. Treasury bill, which is consistent with the post-insolvency 
interest rate applied to claims under section 11(d)(10)(C) of the 
Federal Deposit Insurance Act (the ``FDI Act''), 12 U.S.C. 
1821(d)(10)(C). (See 12 CFR 360.7.)
    Six comments pertaining to Sec.  380.25 of the Proposed Rule were 
received. Commenters variously suggested the use of the federal rate as 
is the practice in some bankruptcy cases, or the contract rate where 
one is specified, or any specified contract rate other than a default 
rate. Two commenters agreed that the use of a post-insolvency interest 
rate based on the average discount rate for the three-month Treasury 
bill is appropriate, at least where no contract rate is provided. One 
commenter pointed out that given the fact that post-insolvency interest 
is paid only after all creditors have been fully paid, the provision 
will rarely, as practical matter, materially affect creditors. As was 
recognized by some commenters, there is no express rule for treatment 
of post-insolvency interest under the Bankruptcy Code and applicable 
case law is not uniform. The Final Rule adopts the language of the 
Proposed Rule with respect to the method of calculating the post-
insolvency interest rate for unsecured claims without change, in favor 
of the consistency and ease of administration of the rate that has been 
applied by the FDIC with respect to claims under the FDI Act.
    Bridge financial companies. Section 380.26 was included in the 
Proposed Rule during the early stages of the rulemaking process because 
of the importance of addressing two issues that were the subject of 
several requests for clarification. First, it made clear that any 
contract or agreement purchased and assumed or entered into de novo by 
the bridge financial company becomes the obligation of the bridge 
financial company and that the bridge financial company shall enforce 
and observe the terms of any such contract or agreement. Secondly, it 
stated that any remaining assets or proceeds of the bridge financial 
company after payment of all administrative expenses and other claims 
shall be distributed to the receiver of the related covered financial 
company for the benefit of the creditors of that covered financial 
company.
    Commenters have continued to call for additional clarifications 
with respect to the treatment of bridge financial companies and their 
assets and liabilities. A more expansive treatment of this topic is 
beyond the scope of the Final Rule and will be the topic of a future 
rulemaking. Accordingly, other than two minor changes to the language 
intended simply to clarify the text, the Final Rule is unchanged from 
the Proposed Rule. The two minor changes are the use of the indefinite 
``any'' in lieu of the definite article ``a'' before ``contract or 
agreement giving rise to such asset or liability'' in paragraph (a), 
and the use of the defined term ``allowed claim'' in place of the word 
``claim'' in the same paragraph. No substantive changes to the Final 
Rule are intended by these corrections.
    Similarly situated creditors. Section 380.27 contains the provision 
found at Sec.  380.2 of the IFR addressing the treatment of similarly 
situated creditors. This provision makes clear that certain categories 
of creditors, including creditors holding unsecured debt with a term of 
more than 360 days, will not be given additional payments compared to 
other general trade creditors or any general or senior liability of the 
covered financial company nor will exceptions be made for favorable 
treatment of holders of subordinated debt, shareholders or other equity 
holders. Although some commenters have supported this rule, others have 
consistently objected to it through two rounds of comments. These 
comments reiterated the objections to this rule that were considered in 
implementing the IFR. Accordingly, the Final Rule contains no change to 
the language of the IFR now set forth in Sec.  380.27(a) and (b). These 
provisions are clearly consistent with the mandate of the Dodd-Frank 
Act expressed in sections 204(a) and 210(a)(1)(M) that the orderly 
resolution of covered financial companies is to be undertaken in a 
manner that ensures that the creditors and shareholders of a covered 
financial company will bear the losses of the covered financial 
company.
    Paragraph (c) of Sec.  380.2 of the IFR has been deleted in its 
entirety from Sec.  380.27 of the Final Rule, and is moved to Sec.  
380.50(b), as the subject of the treatment of secured creditors is 
addressed in Sec. Sec.  380.50-380.53.
    Although not impacting the text of the Final Rule, one new topic 
was addressed in a joint comment letter from two trade associations 
representing the banking and securities industries. This letter 
suggested an alternative approach for the orderly resolution of 
systemically important financial institutions that would provide for 
the exchange of certain subordinated debt for equity. The joint working 
paper prepared by these trade associations describes a recapitalization 
plan that the FDIC could implement follow