Enforcement of Subsidiary and Affiliate Contracts by the FDIC as Receiver of a Covered Financial Company, 18127-18135 [2012-7051]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 77, Number 59 (Tuesday, March 27, 2012)]
[Proposed Rules]
[Pages 18127-18135]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-7051]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 380

 RIN 3064-AD94


Enforcement of Subsidiary and Affiliate Contracts by the FDIC as 
Receiver of a Covered Financial Company

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The FDIC is proposing a rule (``Proposed Rule''), with request 
for comments, that implements section 210(c)(16) of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (the ``Dodd-Frank Act'' or 
the ``Act''), codified at 12 U.S.C. section 5390(c)(16), which permits 
the Corporation, as receiver for a financial company whose failure 
would pose a significant risk to the financial stability of the United 
States (a ``covered financial company''), to enforce contracts of 
subsidiaries or affiliates of the covered financial company despite 
contract clauses that purport to terminate, accelerate, or provide for 
other remedies based on the insolvency, financial condition or 
receivership of the covered financial company. As a condition to 
maintaining these subsidiary contracts in full force and effect, the 
Corporation as receiver must either: transfer any supporting 
obligations of the covered financial company that back the obligations 
of the subsidiary or affiliate under the contract (along with all 
assets and liabilities that

[[Page 18128]]

relate to those supporting obligations) to a bridge financial company 
or qualified third-party transferee by the statutory one-business-day 
deadline; or provide adequate protection to such contract 
counterparties. The Proposed Rule sets forth the scope and effect of 
the authority granted under section 210(c)(16), clarifies the 
conditions and requirements applicable to the receiver, addresses 
requirements for notice to certain affected counterparties, and defines 
key terms.

DATES: Written comments on the Rule must be received by the FDIC no 
later than May 29, 2012.

ADDRESSES: You may submit comments by any of the following methods:
     Agency Web Site: https://www.fdic.gov/regulations/laws/federal. Follow instructions for Submitting comments on the Agency Web 
Site.
     Email: Comments@FDIC.gov. Include ``RIN 3064-AD94'' 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. (EST).
     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 including any 
personal information provided. Comments may be inspected and 
photocopied in the FDIC Public Information Center, 3501 North Fairfax 
Drive, Room E-I002, Arlington, VA 22226, between 9 a.m. and 5 p.m. 
(EST) on business days. Paper copies of public comments may be ordered 
from the Public Information Center by telephone at (877) 275-3342 or 
(703) 562-2200.

FOR FURTHER INFORMATON CONTACT: R. Penfield Starke, Assistant General 
Counsel, Legal Division (703) 562-2422; Elizabeth Falloon, Counsel, 
Legal Division (703) 562-6148; John W. Popeo, Senior Attorney, Legal 
Division (972-761-8171); Charlton R. Templeton, Resolution Planning and 
Implementation Specialist, Office of Complex Financial Institutions 
(202-898-6774).

SUPPLEMENTARY INFORMATION: Title II of the Dodd-Frank Act provides for 
the appointment of the FDIC as receiver of a covered financial company 
that poses a systemic risk to the nation's economic stability and 
outlines the process for the orderly resolution of a covered financial 
company following the FDIC's appointment as receiver. Section 209, 
codified at 12 U.S.C. section 5389, authorizes the FDIC, in 
consultation with the Financial Stability Oversight Council, to 
prescribe rules and regulations as the FDIC considers necessary or 
appropriate with respect to the rights, interests, and priorities of 
creditors, counterparties, security entitlement holders, or other 
persons with respect to any covered financial company and other matters 
necessary or appropriate to the implementation of the orderly 
liquidation authority established under Title II of the Act. Pursuant 
to the authority granted by section 209, the FDIC is issuing the 
Proposed Rule, with request for comments.

I. Background

    Fundamental to the orderly liquidation of a covered financial 
company is the ability to continue key operations, transactions and 
services that will maximize the value of the firm's assets and 
operations and avoid a disorderly collapse in the marketplace. To 
facilitate this continuity of operations, the Dodd-Frank Act provides 
several tools to preserve the value of the covered financial company's 
assets and business lines, including the powers granted in section 
210(c)(16), codified at 12 U.S.C. 5390(c)(16). Specifically, section 
210(c)(16) provides that:

    The Corporation, as receiver for a covered financial company or 
as receiver for a subsidiary of a covered financial company 
(including an insured depository institution) shall have the power 
to enforce contracts of subsidiaries or affiliates of a covered 
financial company, the obligations under which are guaranteed or 
otherwise supported by or linked to the covered financial company, 
notwithstanding any contractual right to cause the termination, 
liquidation, or acceleration of such contracts based solely on the 
insolvency, financial condition or receivership of the covered 
financial company if--
    (i) such guaranty or other support and all related assets and 
liabilities are transferred to and assumed by a bridge financial 
company or a third party (other than a third party for which a 
conservator, receiver, trustee in bankruptcy or other legal 
custodian has been appointed, or which is otherwise the subject of a 
bankruptcy or insolvency proceeding) * * * [by 5 p.m. (eastern time) 
on the business day following the date of appointment]; or
    (ii) the Corporation, as receiver, otherwise provides adequate 
protection with respect to those obligations.

The conditions contained in (i) and (ii) of the quoted statute were 
included to assure counterparties that any contractual right to 
guarantees or other support, including claims on collateral or other 
related assets, would be protected. Thus, section 210(c)(16) requires, 
as a condition to the authority to enforce subsidiary or affiliate 
contracts that are ``linked to'' the financial condition of the covered 
financial corporation through a default provision, that the Corporation 
as receiver transfer any guaranty or other support provided by the 
specified covered financial company for the contractual obligations 
together with all related collateral to a bridge financial company or 
other qualified transferee within one business day after its 
appointment as receiver. In the alternative, if the receiver does not 
transfer the support and the related assets and liabilities, the 
receiver must provide ``adequate protection'' with respect to any 
support or collateral not transferred in order to preserve its right to 
enforce the contract of the subsidiary or affiliate.
    In providing for the orderly liquidation authority of Title II, 
Congress recognized the structural complexity of large financial 
companies that might pose a threat to the financial stability of the 
nation. Accordingly, the Dodd-Frank Act provides certain particular 
authorities with respect to subsidiaries and affiliates of the covered 
financial company. For instance, section 210(a)(1)(E) of the Dodd-Frank 
Act provides an expedited procedure to allow the Corporation to appoint 
itself as the receiver of certain subsidiaries of a covered financial 
company if the Corporation and the Secretary of the Treasury jointly 
determine that such subsidiary is in default or in danger of default 
and that such action would mitigate serious adverse effects on the 
financial stability of the United States and would facilitate the 
orderly liquidation of the covered financial company. That section 
further provides that upon such an appointment, the subsidiary would be 
treated as a covered financial company, and the Corporation would be 
able to exercise the full range of special powers available to the 
receiver.
    In certain cases, however, the receiver for the covered financial 
company may find that the best course of action to maximize the value 
of the covered financial company and to mitigate systemic risk would be 
to avoid actions that place subsidiaries in danger of default or that 
necessitate complex interlocking receiverships. The affiliated legal 
entities that collectively comprise a complex financial institution 
typically share and provide intra-group funding, guarantees, 
administrative support,

[[Page 18129]]

human resources and other operational and business functions. Some of 
these operations and activities may be critical to the day-to-day 
functions and overall operations of the group. In addition, certain 
significant subsidiaries of a covered financial company may be 
essential to core business lines or conduct critical operations that, 
if discontinued, may threaten the stability of the financial markets. 
In these circumstances, orderly liquidation of a covered financial 
company may best be accomplished by establishing a single receivership 
of the parent holding company and transferring valuable operations and 
assets to a solvent bridge financial company, including the stock or 
other equity interests of the company's various subsidiaries. 
Accordingly, the Dodd-Frank Act provides the FDIC with the tools and 
flexibility to act effectively as receiver for the covered financial 
company at the holding company or parent level without placing solvent 
subsidiaries into receivership. This approach may be the best means of 
preserving value, minimizing the shock to the financial system, 
providing additional flexibility to mitigate cross-border resolution 
issues for global systemically-important financial companies, and 
allowing for a more expeditious resolution of a covered financial 
company.
    Where such an approach is adopted, the powers granted to the 
receiver under section 210(c)(16) are essential to preservation of 
going-concern value of the subsidiaries for the benefit of the parent 
in receivership. Absent this statutory provision, counterparties to 
contracts of subsidiaries and affiliates could exercise contractual 
rights to terminate their agreements based upon the insolvency of the 
specified covered financial company. As a result, otherwise viable 
affiliates of the covered financial company could become insolvent, 
thereby inciting the collapse of interrelated companies and potentially 
amplifying ripple effects throughout the economy.
    As described in more detail below, this Proposed Rule would clarify 
the scope of the authority granted in section 210(c)(16) as well as 
conditions and requirements applicable to the receiver. The Proposed 
Rule makes clear that the effect of this enforcement authority is that 
no party may exercise any remedy under a contract simply as a result of 
the appointment of the receiver and the exercise of its orderly 
liquidation authorities as long as the receiver complies with the 
statutory requirements. The Proposed Rule would address requirements 
for notice to affected counterparties and defines key terms. It also 
would clarify the term ``adequate protection'' in a manner consistent 
with its interpretation under the Bankruptcy Code.

II. Proposed Rule

Overview

    The Proposed Rule would clarify that the power of the Corporation 
as receiver to enforce contracts of subsidiaries and affiliates under 
Dodd-Frank Act section 210(c)(16) effectively preserves contractual 
relationships of subsidiaries and affiliates of the covered financial 
company during the orderly liquidation process. The Proposed Rule would 
identify certain contracts that are ``linked to'' the covered financial 
company within the meaning of the statute, as well as contracts that 
also are ``supported by'' the covered financial company. Under the 
statute, a contract is ``linked to'' a covered financial company if it 
contains a provision that provides a contractual right to ``cause the 
termination, liquidation or acceleration of such contract based solely 
on the insolvency, financial condition, or receivership of the covered 
financial company.'' That type of provision, called a ``specified 
financial condition clause'' in the Proposed Rule, is more fully 
defined in the Proposed Rule. Although the statute speaks in terms of 
the power to enforce a contract to which the receiver is not a party, 
the Proposed Rule would recognize the practical effect of the intent of 
this authority, which is that the counterparty to such a contract may 
not exercise remedies in connection with a specified financial 
condition clause if the statutory conditions are met. No action is 
required of the receiver to enforce a linked contract; the Proposed 
Rule would make clear that the contract would remain in full force and 
effect unless the receiver failed to meet the requirements with respect 
to any supporting obligations of the covered financial company.
    The Proposed Rule would establish that if the subsidiaries' 
obligations under the linked contract are supported by the covered 
financial company through, for example, guarantees or the granting of 
collateral that supports the obligations, the Corporation as receiver 
must either (a) transfer such support (along with all related assets 
and liabilities) to a qualified transferee not later than 5 p.m. 
(eastern time) on the business day following the appointment of the 
receiver, or (b) provide ``adequate protection'' to contract 
counterparties following notice given to the counterparties in 
accordance with the guidelines set forth in the Proposed Rule by the 
one-business-day deadline.
    The Proposed Rule also would clarify the meaning of the statutory 
provision regarding a contractual obligation that is ``guaranteed or 
otherwise supported by'' the covered financial company. Support 
includes guarantees that may or may not be collateralized, netting 
arrangements and other examples of financial support of the obligations 
of the subsidiary or affiliate under the contract. In circumstances 
where a contract of a subsidiary or affiliate is linked to the 
financial condition of the parent company via a ``specified financial 
condition clause,'' but where the obligations of the subsidiary or 
affiliate are not ``supported by'' the covered financial company 
through guarantees or similar supporting obligations, the requirement 
to transfer support and related assets or provide adequate protection 
does not apply. The mere existence of a ``specified financial condition 
clause'' does not constitute a ``support'' obligation by the covered 
financial company, and the Proposed Rule would make it clear that the 
subsidiary contract remains enforceable without any requirement to 
effectively create new support where none originally existed. This is 
consistent with the effect of sections 210(c)(13), providing that ipso 
facto clauses in contracts of the covered financial company are 
unenforceable, and 210(c)(8) of the Dodd-Frank Act, providing that 
``walkaway clauses'' in qualified financial contracts of the covered 
financial company are unenforceable. In the case of those types of 
contractual provisions, there is no specified entity required to 
provide support, hence the concept of alternate support or adequate 
protection is inapplicable. In the same way, under the Proposed Rule, 
the concept of adequate protection does not arise in the absence of 
supporting obligations by the specified entity.
    The Proposed Rule similarly applies broadly to all contracts, and 
not solely to qualified financial contracts. For example, a real estate 
lease or a credit agreement, neither of which would typically be 
classified as a qualified financial contract, would be subject to 
enforcement under section 210(c)(16) and the Proposed Rule 
notwithstanding a specified financial condition clause that might, for 
instance, give a lessor the right to terminate a lease based upon a 
change in financial condition of the parent of the lessee. A swap 
agreement of a subsidiary or affiliate would be subject to section 
210(c)(16) and the Proposed Rule in the same manner if the

[[Page 18130]]

agreement contains specified financial condition clause.
    The Proposed Rule would not affect other provisions of the Dodd-
Frank Act governing qualified financial contracts, such as sections 
210(c)(8) (``Certain Qualified Financial Contracts'') and 210(c)(9) 
(``Transfer of Qualified Financial Contracts''). For example, where a 
covered financial company's support of a subsidiary or affiliate 
obligation would itself be considered a qualified financial contract, 
such as a securities contract, the provisions of section 210(c)(9) that 
prohibit the selective transfer of qualified financial contracts with a 
common counterparty (or a group of affiliated counterparties) would 
continue to apply. Likewise, the provisions in section 210(c)(10) of 
the Dodd-Frank Act applicable to counterparties of qualified financial 
contracts also would continue to apply. On the other hand, if the 
covered financial company's support of a subsidiary or affiliate 
consists of multiple contracts that are not qualified financial 
contracts, the Corporation as receiver may transfer all or a portion of 
such group of contracts as long as it provides adequate protection for 
the supporting obligations that were not transferred. Similarly, the 
Corporation may transfer all or a portion of ``related assets and 
liabilities'' that are not qualified financial contracts if it provides 
adequate protection for the portion of the assets and liabilities that 
was retained by the Corporation as receiver.

Section-by-Section Analysis

    Paragraph (a) of the Proposed Rule would state the general rule 
with respect to the authority granted under section 210(c)(16) of the 
Dodd-Frank Act, i.e., that the contracts of a subsidiary or affiliate 
of a covered financial company are enforceable notwithstanding the 
existence of a ``specified financial condition clause'' that provides a 
counterparty with the right to terminate or exercise remedies based 
upon the financial condition of the parent or affiliate covered 
financial company, provided that the FDIC as receiver for the covered 
financial company transfers all support and related assets and 
liabilities that back the obligations of such subsidiary or affiliate. 
To the extent that the receiver fails to transfer all support and 
related assets and liabilities, it must provide adequate protection to 
such counterparty to preserve its right to enforce the contracts of the 
subsidiary. The effect of this ability to enforce the contract is 
intended to be broad enough to preclude the counterparties from 
terminating or exercising other remedies such as requiring additional 
collateral but is intended to be limited in scope solely to remedies 
arising out of a specified financial condition clause not other 
contractual defaults by the subsidiary or affiliate. The ability either 
to transfer support or to provide adequate protection can be exercised 
in the alternative, or in combination. For example, if some, but not 
all collateral is transferred, appropriate adequate protection may be 
provided in lieu of the collateral not transferred.
    The deadline for the transfer of support is the same as the time 
limit applicable to the transfer of qualified financial contracts under 
section 210(c)(10) of the Dodd-Frank Act, i.e., by 5 p.m. (eastern 
time) on the next business day. Although the decision to provide 
adequate protection in lieu of transferring support must also be made 
and steps must be taken that are reasonably calculated to provide 
notice within a business day, the language of the Proposed Rule does 
not require that the adequate protection be fully in place by that 
next-day deadline. Although the failure to complete within a business 
day the documentation or transactions necessary should not be deemed to 
be a waiver of the right to enforce the contract, once the receiver has 
provided notice of its intent to transfer support or provide adequate 
protection, the counterparty would be entitled to the benefit of the 
adequate protection even before the documentation or transfer of 
collateral were fully completed, if necessary.
    The Proposed Rule would provide that a qualified transferee such as 
a bridge financial company or solvent third-party acquirer, as well as 
the Corporation as receiver, would have the authority to enforce linked 
contracts under the section 210(c)(16) of the Dodd-Frank Act. This is 
consistent with the intent of the statute that subsidiary and affiliate 
contracts should remain in effect and enforceable through the entire 
orderly resolution process. Also, the subsidiary or affiliate continues 
to have the ability to enforce the terms of such contract as well. In 
essence, the effect of such authority to enforce is substantively the 
same as a prohibition of the counterparty to assert a specified 
financial condition clause against the subsidiary or affiliate. 
Effectively, the Proposed Rule would make clear that the practical 
effect of the operation of section 210(c)(16) is similar to that of 
section 210(c)(13) (prohibiting counterparties from the exercise of 
certain rights arising out of ipso facto clauses) and section 210(c)(8) 
(prohibiting counterparties to qualified financial contracts from the 
exercise of certain rights arising out of walkaway clauses); i.e., that 
the counterparties are prohibited from exercising remedies under a 
specified financial condition clause if the statutory conditions are 
met.
    The statute expressly states that the power to enforce contracts of 
a subsidiary in the circumstances described in section 210(c)(16) is 
vested in ``[t]he Corporation, as receiver for a covered financial 
company or as receiver for a subsidiary of a covered financial company 
(including an insured depository institution).'' This is captured in 
subparagraph (a)(3) of the Proposed Rule. This recognizes that the 
preservation of value through the enforcement of subsidiary and 
affiliate contracts is important to all of the interconnected entities 
that are related to the entity in receivership. The effect of the 
statute is to prohibit the counterparty from terminating or exercising 
remedies based solely on the condition of the covered financial 
company. Once the essential link to the covered financial company is 
established via the specified financial condition clause, all of the 
subsidiaries of the covered financial company as well as the bridge 
financial company or qualified transferee share the benefit of the 
authority to enforce.

Definitions

    The Proposed Rule would include eight definitions: ``linked,'' 
``specified financial condition clause,'' ``support,'' ``related assets 
and liabilities,'' ``qualified transferee,'' ``subsidiary,'' 
``affiliate,'' and ``control.''
    A contract is ``linked'' to a covered financial company if it 
contains a specified financial condition clause naming the covered 
financial company as the specified company.
    The term ``specified financial condition clause'' is intended to 
broadly capture any provision that gives any counterparty a right to 
terminate, accelerate or exercise default rights or remedies as a 
result of any action or circumstance that results in or arises out of 
the exercise of the orderly liquidation authority. Each aspect of the 
definition of the term ``specified financial condition clause'' should 
be read expansively to effectuate the statutory intent that 
counterparties are effectively stayed from exercising rights under such 
a clause to terminate contracts or exercise other remedies during a 
Title II resolution process if the requirements of the statute are met. 
Thus, a specified financial condition clause includes any clause that 
might be interpreted as giving rise to a termination right or

[[Page 18131]]

other remedy due to the insolvency of the specified covered financial 
company that might have precipitated the appointment of the receiver, 
such as an act of insolvency or a downgrade in a rating from a rating 
agency. Likewise, the definition is broad enough to include a change in 
control provision that creates termination rights or other remedies 
upon the appointment of the FDIC as receiver or other change in 
control, such as the transfer of stock in the subsidiary to the bridge 
financial company or the sale, conversion or merger of the bridge 
financial company or its assets. The intent is to allow the subsidiary 
or affiliate contract to remain in effect despite the exercise of any 
or all of the authorities granted to the FDIC as receiver for a covered 
financial company throughout the orderly liquidation process.
    Although the language of the statute refers to the counterparty's 
rights as ``termination, liquidation or acceleration,'' that list of 
remedies is not intended to be exclusive as the overall intent of the 
statute is to provide the FDIC with the power it needs to preserve 
going-concern value of the covered financial company as long as the 
rights of counterparties to receive bargained-for support is respected. 
Accordingly, the Proposed Rule uses the broader phrase ``terminate, 
liquidate, accelerate or declare a default under'' the contract. In 
effect, the specified financial condition clause is unenforceable if 
the statutory requirements are met. In addition, by clarifying that the 
link created by the specified financial condition clause may operate 
``directly or indirectly,'' the Proposed Rule clarifies that the scope 
of the defined term includes contracts where the specified company 
under the clause may be another company or an affiliate in the 
corporate structure so long as the ultimate triggering event relates to 
the financial condition of the covered financial company or the Title 
II actions take with respect to that covered financial company. The 
term ``specified company'' used in the definition is consistent with 
terminology commonly used in such provisions in derivatives contracts 
to refer to the company whose financial condition is the basis for the 
termination right or other remedy.
    Language in this definition is borrowed from sections of the Dodd-
Frank Act addressing related matters, such as the enforceability of 
contracts of the covered financial company notwithstanding ipso facto 
clauses (section 210(c)(13)) and walkaway clauses with respect to 
qualified financial contracts (section 210(c)(8)(F)). The fact that 
this language is adapted and expanded upon should not be deemed to 
reflect any interpretation of the meaning or possible limitations of 
those sections. The broad language of this definition reflects the 
intent that it be read to accomplish the purpose of section 210(c)(16) 
to ensure that the receiver has the power to avoid precipitous 
terminations by counterparties of the subsidiary resulting in 
disorderly collapse and a loss of value to the covered financial 
company.
    In the event a counterparty (including its affiliates) has more 
than one contract with the subsidiary or affiliate of the covered 
financial company, any contract with a cross-default provision with 
respect to another contract containing a specified financial condition 
clause also would be ``linked.''
    The term ``support'' means to guarantee, indemnify, undertake to 
make any loan, advance or capital contribution, maintain the net worth 
of the subsidiary or affiliate, or provide other financial assistance. 
The proposed definition does not include other assistance that is not 
financial in nature, such as an undertaking to conduct specific 
performance. Generally, if the obligation of the counterparty to 
perform is linked to the financial condition of the parent, the support 
also would likely be financial, and other types of arrangements are 
beyond the scope of what was intended by the statute. We are requesting 
comments with respect to whether this definition is sufficiently 
comprehensive in the Notice of Proposed Rulemaking.
    The term ``related assets and liabilities'' includes assets of the 
covered financial company serving as collateral securing the covered 
financial company's support obligation, and setoff rights or netting 
arrangements to which the covered financial company is subject if they 
are related to the covered financial company's support. It should be 
noted, however, that if the ``support'' were in the nature of a non-
recourse guarantee, or an unsecured limited recourse guarantee, the 
related assets and liabilities would not consist of all of the assets 
of the covered financial company. The transfer of an unsecured 
guarantee or obligation to a qualified transferee would meet the 
requirements of the Proposed Rule in this regard, without the transfer 
of any particular assets. The definition also broadly includes any 
liabilities of the covered financial company that directly arise out of 
or relate to its support of the obligations or liabilities of the 
subsidiary or affiliate. In some instances, this definition may be 
redundant with the definition of support, as a guaranty could be both a 
related liability or a supporting obligation. The broader definition is 
intended to make clear that the full range of supporting obligations 
and related assets and liabilities must be transferred to ensure that 
the counterparties are in substantially the same position as they were 
prior to the transfer to the qualified transferee.
    It is important to note that in some situations ``support'' and 
``related assets and liabilities'' are themselves qualified financial 
contracts. Section 210(c)(8)(D)(ii)(XII) of the Act includes 
``securities contracts'' as qualified financial contracts, and defines 
securities contracts to include ``any security agreement or arrangement 
or other credit enhancement related to any agreement or transaction 
referred to in this clause, including any guarantee or reimbursement 
obligation in connection with any agreement or transaction referred to 
in this clause.'' To the extent such support and related assets and 
liabilities are securities contracts or other forms of qualified 
financial contracts, they are subject to the rules applicable to the 
treatment of qualified financial contracts, including the so-called 
all-or-none rule under section 210(c)(9).
    The term ``qualified transferee'' specifically includes a bridge 
financial company as well as any other unrelated third parties that 
assume the support of the covered financial company (and all related 
assets and liabilities). A qualified transferee can include both the 
bridge financial company and a subsequent transferee; for instance, if 
assets and liabilities, including the support and related assets and 
liabilities are transferred first to a bridge financial company and 
then to another acquirer either prior to or upon the termination of the 
bridge financial company pursuant to the orderly liquidation 
authorities granted under Title II of the Dodd-Frank Act.
    The definition of the terms ``subsidiary'' and ``affiliate'' are 
consistent with the definitions given to such terms in the Dodd-Frank 
Act. Section 2(18) of the Act, codified at 12 U.S.C. 5301(18), provides 
that these terms will have the same meanings as in section 3 of the FDI 
Act (12 U.S.C. 1813). Under the FDI Act, the term ``subsidiary'' is 
broadly defined as ``any company which is owned or controlled directly 
or indirectly by another company * * *.'' ``Affiliate is defined by 
reference to the Bank Holding Company Act, 12 U.S.C. 1841(k) as ``any 
company that controls, is controlled by,

[[Page 18132]]

or is under common control with another company.''
    The statute refers to the definition of ``control'' provided in the 
FDI Act, which in turn, refers to the definition provided in the Bank 
Holding Company Act, 12 U.S.C. 1841(a). The Proposed Rule streamlines 
these cross references, clarifies that certain provisions of the Bank 
Holding Company Act definition are inapplicable in this context, and 
adopts the flexible approach of conforming to the relevant provisions 
of the Bank Holding Company Act and regulations promulgated thereunder 
at the time of appointment of the receiver.
    In effect, the Proposed Rule would define ``control'' to include a 
company that directly or indirectly or acting through one or more 
persons owns, controls, or has the power to vote 25 percent or more of 
any class of voting securities of the company. Under the Proposed Rule, 
a company may also exercise ``control'' if that company controls in any 
manner the election of a majority of the directors or trustees of the 
company. This definition is consistent with the Bank Holding Company 
Act definition as it has been reflected in regulations promulgated 
under that section, including Regulation W (12 CFR 223.3(g)) and 
Regulation Y (12 CFR 225.2(e)).
    Section 2 of the Dodd-Frank Act expressly adopts the FDI Act 
definitions that incorporate the Bank Holding Company Act definitions 
``except to the extent the context otherwise requires.'' Parts of the 
Bank Holding Company Act definition of ``control'' are inapposite to 
the context of section 210(c)(16). Provisions that provide for a 
determination of ``control'' made by the Federal Reserve Board of 
Governors pursuant to a notice and hearing are inconsistent with the 
expedited decisionmaking expressly required by section 210(c)(16) and 
would undermine the statutory goal of providing prompt certainty to 
counterparties with respect to their contractual rights and remedies.

Adequate Protection

    Paragraph (c) of the Proposed Rule describes the different ways 
that the Corporation may provide adequate protection in the event that 
it does not transfer a covered financial company's support to a 
qualified transferee. The definition of adequate protection is 
consistent with the definition in section 361 of the Bankruptcy Code, 
which also formed the basis of the definition of adequate protection in 
the context of treatment of certain secured creditors under 12 CFR 
380.52. Adequate protection may include any of the following: (1) 
Making a cash payment or periodic cash payments to the counterparties 
of the contract to the extent that the failure to cause the assignment 
and assumption of the covered financial company's support and related 
assets and liabilities causes a loss to the counterparties; (2) 
providing to the counterparties a guaranty, issued by the Corporation 
as receiver for the covered financial company, of the obligations of 
the subsidiary or affiliate of the covered financial company under the 
contract; or (3) providing relief that will result in the realization 
by the claimant of the indubitable equivalent of the covered financial 
company's support. The phrase ``indubitable equivalent,'' which appears 
in section 361 of the Bankruptcy Code, is intended to have a meaning 
consistent with its meaning in bankruptcy, in conformance with section 
209 of the Dodd-Frank Act that requires rules promulgated under Title 
II of the Act to be ``harmonized'' with the Bankruptcy Code where 
possible.
    It is important to note that although a guaranty of the Corporation 
as receiver is expressly included among the enumerated examples of 
``adequate protection'' in paragraph (c) of the Proposed Rule, the 
omission of such specific reference in 12 CFR 380.52 is not intended to 
suggest that such a guaranty would not constitute adequate protection 
to secured creditors under to 12 CFR 380.52. The guaranty of the 
receiver is, in any event, the indubitable equivalent of any guaranty 
or support that it may replace, and the express mention of the guaranty 
is added only for the avoidance of any doubt. Any such guaranty issued 
in accordance with the Act would be backed by the assets of the covered 
financial company, and also would be supported by the orderly 
liquidation fund and the authority of the Corporation as manager of the 
orderly liquidation fund to assess the financial industry pursuant to 
section 210(o) of the Act. Such a guaranty would in all events qualify 
as the indubitable equivalent of any guaranty or support that it may 
replace. The express mention of the guarantee is added merely for the 
avoidance of any doubt. The NPR will request comment on whether the 
interpretation of ``adequate protection'' under Section 380.52 should 
be consistent with the interpretation under the Proposed Rule, and 
whether Section 380.52 should be amended to include the express 
reference to the receiver's guarantee for the sake of consistency and 
clarity.

Notice of Transfer or Provision of Adequate Protection

    Paragraph (d) of the Proposed Rule provides that if the Corporation 
as receiver transfers any support and related assets and liabilities of 
the covered financial company or decides to provide adequate protection 
in accordance with subparagraphs (a)(1) and 2, it will promptly take 
steps to notify contract counterparties of such transfer or provision 
of adequate protection. Although the statute does not contain a notice 
requirement, the Proposed Rule would require that these reasonable 
steps be taken to provide notice in recognition of the practical 
reality that contract counterparties will need to know whether they may 
exercise remedies under a specified financial condition clause. In 
acknowledgement of the public's growing reliance on communication using 
the Internet as well as the prevalence of online commerce, the Proposed 
Rule provides that the Corporation may post such notice on its public 
Web site, the Web site of the covered financial company or the 
subsidiary or affiliate, or provide notice via other electronic media. 
While the Corporation will endeavor to provide notice in a manner 
reasonably calculated to provide notification to the parties in a 
timely manner, the provision of actual notice is not a condition 
precedent to enforcing such contracts. Any action by a counterparty in 
contravention of section 210(c)(16) will be ineffective, whether or not 
such counterparty had actual notice of the transfer of support or 
provision of adequate protection. Further, where the contract of the 
subsidiary or affiliate is linked to the covered financial company but 
not otherwise supported by the covered financial company, actual notice 
of by the Corporation of its appointment as receiver or its intent to 
exercise the authority under section 210(c)(16) is not required.

III. Request for Comments

    The FDIC seeks comments on all aspects of the Proposed Rule. 
Comments will be considered by the FDIC and appropriate revisions will 
be made to the Proposed Rule, if necessary, before a final rule is 
issued. Comments are specifically requested on the following:
    1. What terms defined by the Proposed Rule require further 
clarification, and how should they be defined?
    2. Are there other terms used in the Proposed Rule that should be 
defined? Should the term ``Business Day'' be defined in the regulation 
consistent

[[Page 18133]]

with the definition found in section 210(c)(10)(D) of the Dodd-Frank 
Act?
    3. Are the scopes of the definitions of ``support'' and ``related 
assets and liabilities'' sufficiently broad so as to cover 
substantially all of the forms of financial assistance and related 
assets and liabilities that a company may provide in support of the 
obligations of the subsidiary or affiliate? If the scope is not 
sufficiently broad, please provide specific examples if possible.
    4. Is the definition of ``control'' used for purposes of 
determining whether an entity is a subsidiary or affiliate of the 
covered financial company sufficient? Is it sufficiently clear?
    5. Is the definition of ``adequate protection'' appropriately 
consistent with the definition found elsewhere in Part 380, in 
particular with the definition found at 12 CFR 380.52? Is the specific 
mention of guarantees of the receiver as a form of adequate protection 
necessary to clearly signal that this is one of the options available 
to the receiver? If so, should 12 CFR 380.52 be amended to specifically 
reference guarantees of the receiver as a form of adequate protection 
to assure that these provisions will be interpreted in harmony?
    6. Under the Proposed Rule, the Corporation is required to promptly 
take steps to notify contract counterparties when the covered financial 
company's support and related assets and liabilities have been 
transferred to a qualified transferee, or when the Corporation provides 
adequate protection with respect to the obligations of a subsidiary or 
affiliate of the covered financial company. Are the steps described 
reasonably calculated to provide notice? Is the scope of circumstances 
in which notice is provided appropriate?
    7. Is the Proposed Rule sufficiently clear that no action is 
required of the receiver to preserve the enforceability of a contract 
as long as the conditions with respect to the transfer of support or 
provision of adequate protection are met?
    8. Is the Proposed Rule definition of specified financial condition 
clear? Is the definition broad enough to cover all orderly liquidation 
events from the point at which the covered financial company is 
insolvent or in danger of default to the final liquidation and transfer 
of assets of the covered financial company? Is it sufficiently limited 
to make clear that the ability to enforce contracts is limited to 
events arising out of the specified financial condition clause and is 
not intended to affect rights or remedies arising out of defaults 
unrelated to the financial condition of the covered financial company 
or the related exercise of orderly liquidation authority?

IV. Regulatory Analysis and Procedure

A. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (44 U.S.C. 3501, et 
seq.) (``PRA''), the FDIC may not conduct or sponsor, and a person is 
not required to respond to, a collection of information unless it 
displays a currently valid Office of Management and Budget (OMB) 
control number. The Proposed Rule would not involve any new collections 
of information pursuant to the Paperwork Reduction Act (44 U.S.C. 3501, 
et seq.). Consequently, no information will be submitted to the Office 
of Management and Budget for review.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act 5 U.S.C. 601, et seq. (RFA) requires 
each federal agency to prepare a final regulatory flexibility analysis 
in connection with the promulgation of a final rule, or certify that 
the final rule will not have a significant economic impact on a 
substantial number of small entities.\1\ Pursuant to Section 605(b) of 
the Regulatory Flexibility Act, the FDIC certifies that the Proposed 
Rule will not have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \1\ See 5 U.S.C. 603, 604 and 605.
---------------------------------------------------------------------------

    Under regulations issued by the Small Business Administration 
(``SBA''), a ``small entity'' includes those firms within the ``Finance 
and Insurance'' sector with asset sizes that vary from $7 million or 
less in assets to $175 million or less in assets.\2\
---------------------------------------------------------------------------

    \2\ 13 CFR 121.201.
---------------------------------------------------------------------------

    The Proposed Rule will clarify rules and procedures for the 
liquidation of a nonviable systemically important financial company, to 
provide internal guidance to FDIC personnel performing the liquidation 
of such a company and to address any uncertainty in the financial 
system as to how the orderly liquidation of such a company would be 
conducted. As such, the Proposed Rule will not have a significant 
economic impact on small entities.

C. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the Proposed Rule will not affect 
family well-being within the meaning of Section 654 of the Treasury and 
General Government Appropriations Act, enacted as part of the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act of 1999 
(Pub. L. 105-277, 112 Stat. 2681).

D. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act (Pub. L. 106-102, 113 
Stat. 1338, 1471), requires the Federal banking agencies to use plain 
language in all proposed and final rules published after January 1, 
2000. The FDIC has sought to present the Proposed Rule in a simple and 
straightforward manner.

List of Subjects in 12 CFR Part 380

    Banks, banking, Financial companies, Holding companies, Insurance 
companies, Mutual insurance holding companies.

    For the reasons stated above, the Board of Directors of the Federal 
Deposit Insurance Corporation proposes to amends part 380 of title 12 
of the Code of Federal Regulations as follows:

PART 380--ORDERLY LIQUIDATION AUTHORITY

    1. The authority citation for part 380 is revised to read as 
follows:

    Authority: 12 U.S.C. 5383(e); 12 U.S.C. 5389; 12 U.S.C. 
5390(c)(16); 12 U.S.C. 5390(s)(3); 12 U.S.C. 5390(b)(1)(C); 12 
U.S.C. 5390(a)(7)(D).

    2. The heading for subpart A is revised to read as follows:
Subpart A--General and Miscellaneous Provisions
Sec.
380.1 Definitions.
380.2 [Reserved]
380.3 Treatment of personal service agreements.
380.4 [Reserved]
380.5 Treatment of covered financial companies that are subsidiaries 
of insurance companies.
380.6 Limitation on liens on assets of covered financial companies 
that are insurance companies or covered subsidiaries of insurance 
companies.
380.7 Recoupment of compensation from senior executives and 
directors.
380.8 [Reserved]
380.9 Treatment of fraudulent and preferential transfers.
380.10 Calculation of maximum obligation limitation.
380.11 Treatment of mutual insurance holding companies.
380.12 Enforcement of subsidiary and affiliate contracts by the FDIC 
as receiver of a covered financial company.
380.13-380.19 [Reserved]

    3. Revise Sec.  380.12 to read as follows:


Sec.  380.12  Enforcement of certain contracts of a subsidiary or 
affiliate of the covered financial company.

    (a) General. (1) Contracts of subsidiaries or affiliates of a 
covered

[[Page 18134]]

financial company that are linked to or supported by the covered 
financial company shall remain in full force and effect notwithstanding 
any specified financial condition clause contained in such contract and 
no counterparty shall be entitled to terminate, accelerate, liquidate 
or exercise any other remedy arising solely by reason of such specified 
financial condition clause. The Corporation as receiver for the covered 
financial company and any qualified transferee shall have the power to 
enforce such contracts according to their terms.
    (2) Notwithstanding paragraph (a)(1) of this section, if the 
obligations under such contract are supported by the covered financial 
company then such contract shall be enforceable only if--
    (i) Any such support together with all related assets and 
liabilities are transferred to and assumed by a qualified transferee 
not later than 5 p.m. (eastern time) on the business day following the 
date of appointment of the Corporation as receiver for the covered 
financial company; or
    (ii) If and to the extent paragraph (a)(2)(i) of this section is 
not satisfied, the Corporation as receiver otherwise provides adequate 
protection to the counterparties to such contracts with respect to the 
covered financial company's support of the obligations or liabilities 
of the subsidiary or affiliate and provides notice consistent with the 
requirements of paragraph (d) of this section not later than 5 p.m. 
(eastern time) on the business day following the date of appointment of 
the Corporation as receiver.
    (3) The Corporation as receiver of a subsidiary of a covered 
financial company (including a failed insured depository institution 
that is a subsidiary of a covered financial company) may enforce any 
contract that is enforceable by the Corporation as receiver for a 
covered financial company under paragraphs (a)(1) and (a)(2) of this 
section.
    (b) Definitions. For purposes of this part, the following terms 
shall have the meanings set forth below:
    (1) A contract is ``linked'' to a covered financial company if it 
contains a specified financial condition clause that specifies the 
covered financial company.
    (2)(i) A ``specified financial condition clause'' means any 
provision of any contract (whether expressly stated in the contract or 
incorporated by reference to any other contract, agreement or document) 
that permits a contract counterparty to terminate, accelerate, 
liquidate or exercise any other remedy under any contract to which the 
subsidiary or affiliate is a party or to obtain possession or exercise 
control over any property of the subsidiary or affiliate or affect any 
contractual rights of the subsidiary or affiliate directly or 
indirectly based upon or by reason of
    (A) A change in the financial condition or the insolvency of a 
specified company that is a covered financial company;
    (B) The appointment of the FDIC as receiver for the specified 
company or any actions incidental thereto including, without 
limitation, the filing of a petition seeking judicial action with 
respect to the appointment of the Corporation as receiver for the 
specified company and the issuance of recommendations or determinations 
of systemic risk;
    (C) The exercise of rights or powers by the Corporation as receiver 
for the specified company, including, without limitation, the 
appointment of the Securities Investor Protection Corporation (SIPC) as 
trustee in the case of a specified company that is a covered broker-
dealer and the exercise by SIPC of all of its rights and powers as 
trustee;
    (D) The transfer of assets or liabilities to a bridge financial 
company or other qualified transferee;
    (E) Any actions taken by the FDIC as receiver for the specified 
company to effectuate the liquidation of the specified company; or (vi) 
any actions taken by or on behalf of the bridge financial company to 
operate and terminate the bridge financial company including the 
dissolution, conversion, merger or termination of a bridge financial 
company or actions incidental or related thereto.
    (ii) Without limiting the general language of paragraphs (b)(1) and 
(b)(2) of this section, a specified financial condition clause includes 
a ``walkaway clause'' as defined in 12 U.S.C. 5390(c)(8)(F)(iii) or any 
regulations promulgated thereunder.
    (3) The term ``support'' means undertaking any of the following for 
the purpose of supporting the contractual obligations of a subsidiary 
or affiliate of a covered financial company for the benefit of a 
counterparty to a linked contract--
    (i) To guarantee, indemnify, undertake to make any loan or advance 
to or on behalf of the subsidiary or affiliate;
    (ii) To undertake to make capital contributions to the subsidiary 
or affiliate; or
    (iii) To be contractually obligated to provide any other financial 
assistance to the subsidiary or affiliate.
    (4) The term ``related assets and liabilities'' means--
    (i) Any assets of the covered financial company that directly serve 
as collateral for the covered financial company's support (including a 
perfected security interest therein or equivalent under applicable 
law);
    (ii) Any rights of offset or setoff or netting arrangements that 
directly arise out of or directly relate to the covered financial 
company's support of the obligations or liabilities of its subsidiary 
or affiliate; and
    (iii) Any liabilities of the covered financial company that 
directly arise out of or directly relate to its support of the 
obligations or liabilities of the subsidiary or affiliate.
    (5) A ``qualified transferee'' means any bridge financial company 
or any third party (other than a third party for which a conservator, 
receiver, trustee in bankruptcy, or other legal custodian has been 
appointed, or which is otherwise the subject of a bankruptcy or 
insolvency proceeding).
    (6) A ``subsidiary'' means any company which is controlled by 
another company at the time of, or immediately prior to, the 
appointment of receiver of the covered financial company.
    (7) An ``affiliate'' means any company that controls, is controlled 
by, or is under common control with another company at the time of, or 
immediately prior to, the appointment of receiver of the covered 
financial company.
    (8) The term ``control'' has the meaning given to such term under 
12 U.S.C. 1841(a)(2)(A) and (B) as such law, or any successor, may be 
in effect at the date of the appointment of the receiver, together with 
any regulations promulgated thereunder then in effect.
    (c) Adequate Protection.
    The Corporation as receiver for a covered financial company may 
provide adequate protection with respect to a covered financial 
company's support of the obligations and liabilities of a subsidiary or 
an affiliate pursuant to paragraph (a)(2)(ii) of this section by any of 
the following means:
    (1) Making a cash payment or periodic cash payments to the 
counterparties of the contract to the extent that the failure to cause 
the assignment and assumption of the covered financial company's 
support and related assets and liabilities causes a loss to the 
counterparties;
    (2) Providing to the counterparties a guaranty, issued by the 
Corporation as receiver for the covered financial company, of the 
obligations of the subsidiary or affiliate of the covered financial 
company under the contract; or
    (3) Providing relief that will result in the realization by the 
counterparty of the indubitable equivalent of the

[[Page 18135]]

covered financial company's support of such obligations or liabilities.
    (d) Notice of Transfer of Support or Provision of Adequate 
Protection.
    If the Corporation as receiver for a covered financial company 
transfers any support and related assets and liabilities of the covered 
financial company in accordance with paragraph (a)(2)(i) of this 
section or provides adequate protection in accordance with paragraph 
(a)(2)(ii) of this section, it shall promptly take steps to notify 
contract counterparties of such transfer or provision of adequate 
protection. Notice shall be given in a manner reasonably calculated to 
provide notification in a timely manner, including, but not limited to, 
notice posted on the Web site of the Corporation, the covered financial 
company or the subsidiary or affiliate, notice via electronic media, or 
notice by publication. Neither the failure to provide actual notice to 
any party nor the lack of actual knowledge on the part of any party 
shall affect the authority of the Corporation or a qualified transferee 
to enforce any contract or exercise any rights or powers under this 
section.

    Dated at Washington, DC, this 20th day of March 2012.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2012-7051 Filed 3-26-12; 8:45 am]
BILLING CODE 6714-01-P