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41626 Federal Register / Vol. 76, No. 136/ Friday, July 15, 2011/ Rules and Regulations

BILLING CODE 621001C; 675001C

By order of the Board of Governors of theFederal Reserve System, July 5, 2011.

Jennifer J. Johnson,

Secretary of the Board.

By the direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 201117649 Filed 71411; 8:45 am]

BILLING CODE 621001P; 675001P

FEDERAL DEPOSIT INSURANCECORPORATION

12 CFR Part 380

Certain Orderly Liquidation AuthorityProvisions under Title II of the Dodd-Frank Wall Street Reform andConsumer Protection Act

AGENCY: Federal Deposit InsuranceCorporation (FDIC).

ACTION: Final rule.

SUMMARY: The FDIC is issuing a finalrule (Final Rule) to implement certainprovisions of its authority to resolvecovered financial companies under TitleII of the Dodd-Frank Wall Street Reformand Consumer Protection Act (theDodd-Frank Act or the Act). TheFinal Rule will establish a morecomprehensive framework for theimplementation of the FDICs orderlyliquidation authority and will providegreater transparency to the process for

the orderly liquidation of a systemicallyimportant financial institution underthe Dodd-Frank Act.

DATES: The effective date of the FinalRule is August 15, 2011.FOR FURTHER INFORMATION CONTACT: R.Penfield Starke, Senior Counsel, LegalDivision, (703) 5622422; or MarcSteckel, Associate Director, Division of

Insurance and Research, (202) 8983618. For questions to the LegalDivision concerning the following partsof the Final Rule contact:

Avoidable transfer provisions: PhillipE. Sloan, Counsel (703) 5626137.

Compensation recoupment: PatriciaG. Butler, Counsel (703) 5165798.

Subpart BPriorities of Claims:Elizabeth Falloon, Counsel (703) 5626148.

Subpart CReceivershipAdministrative Claims Procedures:Thomas Bolt, Supervisory Counsel (703)5622046.

SUPPLEMENTARY INFORMATION

:I. Background

The Dodd-Frank Act (Pub. L. 111203, 12 U.S.C. 5301 et seq.,July 21,2010) was enacted on July 21, 2010.Title II of the Act provides for theappointment of the FDIC as receiver ofa nonviable financial company thatposes significant risk to the financialstability of the United States (a coveredfinancial company) following theprescribed recommendation,determination, and judicial review

process set forth in the Act. Title IIoutlines the process for the orderlyliquidation of a covered financialcompany following the FDICsappointment as receiver and providesfor additional implementation of theorderly liquidation authority byrulemaking. The Final Rule is beingpromulgated pursuant to section 209 of

the Act, which authorizes the FDIC, inconsultation with the Financial StabilityOversight Council, to prescribe suchrules and regulations as the FDICconsiders necessary or appropriate toimplement Title II; section 210(s)(3),which directs the FDIC to promulgateregulations to implement therequirements of the Act with respect torecoupment of compensation fromsenior executives or directors materiallyresponsible for the failed condition of acovered financial company, whichregulation is required to include adefinition of the term compensation;

section 210(a)(7)(D), with respect to theestablishment of a post-insolvencyinterest rate; and section 210(b)(1)(C)(D), with respect to the index forinflation applied to certain employeecompensation and benefit claims. Whileit is not expected that the FDIC will beappointed as receiver for a coveredfinancial company in the near future, itis important for the FDIC to have rulesin place in a timely manner so thatstakeholders may plan transactionsgoing forward.

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41627Federal Register / Vol. 76, No. 136/ Friday, July 15, 2011/ Rules and Regulations

1Section 210(a)(7)(B) provides that a creditorshall, in no event, receive less than the amount thatsuch creditor is entitled to receive under a chapter7 liquidation of such covered financial company inbankruptcy.

The Final Rule represents aculmination of an initial phase ofrulemaking under Title II of the Dodd-Frank Act with respect to theimplementation of its authority toundertake the orderly liquidation of acovered financial company. On October19, 2010, the FDIC published in theFederal Register a notice of proposed

rulemaking (75 FR 64173, October 19,2010). Following consideration ofcomments received, that proposed rulewas implemented as an Interim FinalRule (IFR) issued on January 25, 2011,and was codified at 12 CFR part 380,consisting of 380.1380.6 (76 FR4207, January 25, 2011). The IFRaddressed discrete topics that werecritical for initial guidance for thefinancial industry, including thepayment of similarly situated creditors,the honoring of personal serviceagreements, the recognition ofcontingent claims, the treatment of any

remaining shareholder value in the caseof a covered financial company that isa subsidiary of an insurance companyand limitations on liens that the FDICmay take on the assets of a coveredfinancial company that is an insurancecompany or a covered subsidiary of aninsurance company. The FDIC requestedadditional general comments on the IFRas well as comments relating to specificprovisions. The comment period for theIFR ended on March 28, 2011.

On March 15, 2010, the FDIC issueda notice of proposed rulemakingcovering additional subjects pertinent to

an orderly liquidation under Title II ofthe Act (76 FR 16324, March 23, 2011).The purpose of the proposed rule (theProposed Rule) that was the subject ofthis second notice was to continue to

build on the framework initially begunwith the IFR. The Proposed Ruleaddressed the recoupment ofcompensation from senior executivesand directors of a covered financialcompany; further clarified the definitionof financial company in section 201of the Dodd-Frank Act by detailing whatit means to be predominantly engagedin activities that are financial or

incidental thereto; clarified thereceivers powers to avoid fraudulentand preferential transfers by a coveredfinancial company; addressed the orderof priority for the payment of claims,which included clarifying the meaningof administrative expenses andamounts owed to the United States,the priority for setoff claims, how post-insolvency interest is to be paid, thepayment of claims for contracts andagreements expressly assumed by a

bridge financial company; andaddressed the receivership

administrative claims process, includingthe treatment of secured claims. Thenotice of proposed rulemakingpublished in the Federal Registerrequested comments on all aspects ofthe Proposed Rule as well as commentsrelating to specific provisions. Thecomment period ended May 23, 2011.

II. Summary of Comments on the IFRand the Proposed Rule

The FDIC received 10 comments inresponse to the IFR and 21 comments inresponse to the Proposed Rule. Almostall of the comments were submitted byfinancial industry trade associations,with others submitted by insurancetrade associations, clearing andsettlement companies, a foundation forresearch and advocacy, a committee of

bankruptcy attorneys, a group of lawand business school faculty, and a groupof law school students.

The general themes of comments thatdid not directly relate to the text of theIFR and Proposed Rule were wide-ranging. Commenters simultaneouslyurged prompt and comprehensiverulemaking to increase transparencywith respect to the implementation ofthe orderly liquidation authority andcertainty in the implementation ofongoing and future financialtransactions, while counseling adeliberate pace to allow input fromindustry representatives and the benefitof the review of resolution plans priorto the implementation of rulesgoverning the orderly liquidationprocess.

Many comments urged the greatestpossible harmony with bankruptcylaws, rules and processes. Thesecomments sought, among other things:Increased input from creditors andcreditor committees, deference to

bankruptcy case law, adoption ofbankruptcy reporting processes, andearlier and broader judicial input andreview. In this connection, commentsrequested greater clarity with respect tothe procedures that the FDIC will followin determining claims and valuations ofcollateral and assets, as well as anappeals procedure for disputedvaluations of property. Commenters alsourged clarification with respect to theimplementation of the so-calledChapter 7 minimum payment tocreditors pursuant to section210(a)(7)(B) of the Act.1

Commenters from the insuranceindustry similarly urged the greatestpossible deference to state regulators

and to state laws, rules and regulationsgoverning insurance companies. Onecommenter has repeatedly requestedclarification that mutual insuranceholding companies will be treated asinsurance companies for the purposes ofthe Dodd-Frank Act.

Comments emphasized theimportance of maximizing the going

concern value of the business and assetsof the covered financial company andsuggested establishment of standards forthe conduct of sales of assets andcollateral. A specific concern was theneed for clarification of the treatment ofcustodial assets held by non-banks in anorderly liquidation.

Another broad theme was theimportance of clarifying the process andcriteria for designating systemicallyimportant financial companies that may

be subject to orderly liquidation. Thesecomments generally sought to limit thescope of such a designation. In additionto general comments on this theme, onecommenter took the position that moneymanagers should never be consideredsystemically important. Anothercommenter took the same position withrespect to money funds. Additionalclarification also was sought withrespect to the process for thedesignation of covered financialcompanies and the appointment of thereceiver.

The implementation of specialassessments and the clawback ofpreferential payments made to similarlysituated creditors has been a recurringtheme in comments to the IFR and the

Proposed Rule. Commenters soughtclarity with respect to the designation ofpreferential payments deemed necessaryto essential operations that are exemptfrom the clawback under section 210(o)of the Dodd-Frank Act. Other commentsurged restraint in making preferentialpayments and suggested additionalprocedural safeguards with respect tothis process. Comments also urgedcareful consideration of any need forspecial assessments on the industry toavoid undue burden on well-runcompanies.

Commenters requested additional

clarification of the implementation ofthe authority to create bridge financialcompanies, including the processes andprocedures for creating and terminating

bridge financial companies, thetreatment of assets transferred to bridgefinancial companies, and the treatmentof claims against bridge financialcompanies. One commenter suggested arule clarifying that all qualifiedfinancial contracts will be transferred toa bridge financial company.

Commenters also expressed concernabout the process for resolving an


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international financial company andstressed the need for internationalcooperation and coordination.

Finally, one commenter argued thatthe IFR and the Proposed Rule areunconstitutionally broad and usurp thelegislative function constitutionallydelegated to Congress.

Comments beyond the scope of theIFR and the Proposed Rule will beconsidered in connection with futurerulemakings. Comments relating tospecific provisions of the IFR andProposed Rule are discussed below inthe analysis of the relevant sections ofthe Final Rule.

III. The Final Rule

A. Overview

The Final Rule will divide Part 380into subparts A, B, and C. In subpart A, 380.1 provides definitions of generalapplicability in part 380. Section 380.3

provides that services rendered byemployees to the covered financialcompany after the FDIC has beenappointed as receiver, or during theperiod where some or all of theoperations of the covered financialcompany are continued by a bridgefinancial company, will be compensatedaccording to the terms and conditions ofany applicable personal serviceagreements and that such payments will

be treated as an administrative expense.Section 380.5 provides that if the FDICacts as receiver for a direct or indirectsubsidiary of an insurance company and

that subsidiary is not an insureddepository institution or an insurancecompany itself, the value realized fromthe liquidation of the subsidiary will bedistributed according to the order ofpriorities set forth in the Dodd-FrankAct. Section 380.6 provides that theFDIC will avoid taking a lien on someor all of the assets of a covered financialcompany that is an insurance companyor a subsidiary that is an insurancecompany unless it determines thattaking such a lien is necessary for theorderly liquidation of the coveredfinancial company and will not unduly

impede or delay the liquidation orrehabilitation of the insurance companyor the recovery by its policyholders.Section 380.7 provides that the FDIC asreceiver of a covered financial companymay recover from senior executives anddirectors who were substantiallyresponsible for the failed condition ofthe covered financial company anycompensation they received during thetwo-year period preceding the date onwhich the FDIC was appointed asreceiver, or for an unlimited period inthe case of fraud.

The Proposed Rule included 380.8,implementing section 201(b) of the Act.Section 201(b) of the Act requires theFDIC, in consultation with the Secretaryof the U.S. Treasury, to establish byregulation criteria for determining, forthe purposes of Title II, if a company ispredominantly engaged in activities thatare financial in nature or incidental

thereto as determined by the Board ofGovernors of the Federal ReserveSystem (Board of Governors) undersection 4(k) of the Bank HoldingCompany Act (BHC Act). A companythat is predominantly engaged in suchactivities is a financial companyunder Title II (unless expresslyexcluded by section 201(a)(11)(C) of theAct) and may be subject to the orderlyliquidation provisions of the Dodd-Frank Act. On February 11, 2011, theBoard of Governors published a noticeof proposed rulemaking entitledDefinitions of Predominantly Engaged

in Financial Activities and SignificantNonbank Financial Company and BankHolding Company (76 FR 7731,February 11, 2011) (Board ofGovernors NPR).

The Board of Governors NPRproposed criteria for determiningwhether a company is predominantlyengaged in financial activities forpurposes of determining if the companyis a nonbank financial company underTitle I of the Act. There are substantialsimilarities between the provisions inTitle I of the Act, which the Board ofGovernors NPR implements, andsection 201(b) of the Act, which 380.8

of the FDICs Proposed Rule wouldimplement. In light of those similarities,the FDIC staff coordinated with the staffof the Board of Governors, to the extentpracticable, on the proposed criteria in 380.8. The FDIC staff is continuing tocoordinate with the staff of the Board ofGovernors on this issue and intends tofinalize the criteria for determining if acompany is predominantly engaged inactivities that are financial in nature orincidental thereto through a separatenotice in the Federal Register.Consequently, 380.8 is reserved in theFinal Rule.

Section 380.9 in subpart A clarifiesthe interpretation of provisions of theAct authorizing the FDIC as receiver ofa covered financial company to avoidfraudulent or preferential transfers in amanner comparable to the relevantprovisions of the Bankruptcy Code sothat transferees will have the sametreatment in a liquidation under the Actas they would have in a bankruptcyproceeding.

Subpart B of the Final Rule addressesthe priorities for expenses of thereceiver of a covered financial company

and other unsecured claims against thecovered financial company or thereceiver. Subpart B integrates andharmonizes the various provisions ofthe Dodd-Frank Act that determine thenature and priority of payments. Inparticular, the subpart integrates thevarious statutory references toadministrative expenses throughout the

Act. It also provides additional contextwith respect to the definition ofamounts owed to the United States toclarify that unsecured obligationsadvanced to provide funds for theorderly liquidation of a coveredfinancial company or to avoid ormitigate adverse effects on the financialstability of the United States in theliquidation of the covered financialcompany are included among the classof claims paid at the higher statutorylevel accorded to amounts owed to theUnited States, while unsecuredobligations to the United States that

were incurred by the covered financialcompany in the ordinary course of itsbusiness prior to the appointment of thereceiver will be paid at the priority ofgeneral unsecured or senior liabilities ofthe covered financial company.Additionally, subpart B confirms thestatutory treatment of claims arising outof the loss of setoff rights at a priorityahead of other general unsecuredcreditors if the loss of the setoff is dueto the receivers sale or transfer of anasset, finalizes the methodology forcalculating post-insolvency interest onunsecured claims and clarifies the

payment of obligations of bridgefinancial companies and the rights ofreceivership creditors to any remainingvalue upon termination of a bridgefinancial company. For a more logicalorganizational flow, subpart B also nowincludes at 380.27 the rule originallyfound at 380.2 of the IFR, clarifyingthat the FDIC will not use its discretionto differentiate among similarly situatedcreditors under section 210 of the Act togive preferential treatment to certainlong-term senior debt with a term longerthan 360 days, and that subordinateddebt and equity never will qualify forpreferential treatment.

Subpart C sets forth theadministrative process for thedetermination of claims against acovered financial company asestablished by relevant provisions of theDodd-Frank Act. This process will notapply to any liabilities or obligationsassumed by a bridge financial companyor other entity or to any extension ofcredit from a Federal reserve bank or theFDIC to a covered financial company.Under the claims procedures, thereceiver will publish and mail a notice


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to advise creditors to file their claims bya bar date that is not less than 90 daysafter the date of the initial publication.The receiver will have up to 180 daysto determine whether to allow ordisallow the claim, subject to anyextension agreed to by the claimant. Theclaimant will have 60 days from theearlier of any disallowance of the claim

or the end of the 180-day period (or anyperiod extended by agreement) to file alawsuit in federal court for a judicialdetermination. No court has jurisdictionover any claim, however, unless theclaimant has exhausted itsadministrative remedies through theclaims process.

Subpart C also includes provisionsconcerning contingent claims andsecured claims. With respect to claims

based on a contingent obligation of acovered financial company, the receiverwill estimate the value of the contingentclaim at the end of either the 180-day

claim determination period or anyextended period agreed to by theclaimant. If the claim becomes fixed

before it has been estimated, it may beallowed in the fixed amount; otherwise,the estimated value will be used tocalculate the claimants pro ratadistribution. With respect to securedclaims, subpart C provides that propertyof a covered financial company thatsecures a claim will be valued at thetime of the proposed use or dispositionof the property. Secured claimants mayrequest the consent of the receiver toobtain possession of or exercise controlover their collateral. The Final Rule

provides that the receiver will grantconsent unless it decides to use, sell orlease the property, in which case it mustprovide adequate protection of theclaimants security interest in theproperty. This provision will not applyin a case where the receiver repudiatesor disaffirms a secured contract,however.

B. Summary of Changes From the IFRand the Proposed Rule

The Final Rule contains substantiverevisions and technical corrections tothe provisions of the IFR and the

Proposed Rule responsive to thecomments received. The changes arediscussed in more detail in the section-

by-section analysis of the Final Rule. Insummary, the substantive revisions inthe Final Rule are as follows:

(1) In the Proposed Rule, 380.2(c)provided that collateral securing claimsagainst the covered financial companywould be valued as of the date of theappointment of the receiver. Thisprovision has been moved to 380.50(b)of the Final Rule, which states that suchproperty will be valued at the time of

the proposed use or disposition of theproperty. This approach to the valuationof collateral follows the comparableprovision of the Bankruptcy Code.

(2) Section 380.4 of the IFRconcerning contingent claims has beenmoved to 380.39 of the Final Rule. Theoriginal text of this section has beenretained and new provisions have been

added to provide that the receiver willestimate the value of a contingent claimno later than 180 days after the claim isfiled or any extended period agreed to

by the claimant.(3) Section 380.7 addresses the

recoupment of compensation fromformer and current senior executivesand directors who are substantiallyresponsible for the failed condition ofthe covered financial company. TheProposed Rule provided a standard ofconduct in which, among other things,a senior executive or director would bedeemed substantially responsible ifhe or she failed to conduct his or herresponsibilities with the requisitedegree of skill and care required by thatposition. The Final Rule clarifies thestandard and provides that a seniorexecutive or director would be deemedsubstantially responsible if he or shefailed to conduct his or herresponsibilities with the degree of skilland care an ordinarily prudent personin a like position would exercise undersimilar circumstances. The revisionclarifies that the standard of care thatwill trigger section 210(s) is a negligencestandard; a higher standard, such asgross negligence, is not required. The

Final Rule was also revised to reflectthat the FDIC as receiver maycommence an action to seek recoupmentand has a savings clause to preservethe rights of the FDIC as receiver torecoup compensation under allapplicable laws.

(4) As discussed, the provision in 380.8 of the Proposed Rule regardingthe criteria for determining if a companyis predominantly engaged in activitiesthat are financial in nature or incidentalthereto will be the subject of futurerulemaking. Section 380.8 is reserved inthe Final Rule.

(5) Section 380.21 of the ProposedRule enumerated the priorities ofpayments to unsecured creditors. A newsentence is added in the Final Rule toprovide that contractual subordinationagreements will be respected, which isconsistent with the practice in

bankruptcy.(6) The Proposed Rule contained a

definition of amounts owed to theUnited States that would be entitled tothe priority of claims immediatelyfollowing administrative expenses, thatincluded all amounts of any kind owed

to any department, agency orinstrumentality of the United States.Under the Final Rule, the definition ofamounts owed to the United States in 380.23 has been revised to clarify thatthe obligations entitled to the priorityafforded to amounts owed to theUnited States include only amountsadvanced to the covered financial

company to promote the orderlyresolution of the covered financialcompany or to avoid or mitigate adverseeffects on the financial stability of theUnited States in the resolution of thecovered financial company. Consistentwith the goal of the Dodd-Frank Act toend any taxpayer bail-out of a nonviablefinancial company, unpaid unsecuredfederal income tax obligations also arerepaid at the priority afforded toamounts owed to the United States. Inresponse to comments and to provideclearer guidance, this section also setsforth a non-exclusive list of included

types of advances, and a similar list ofexcluded types of advances. The level ofpriority afforded to amounts owed to theUnited States is not applicable toadministrative expenses, which aredealt with in 380.22, nor to securedobligations, which are dealt with in 380.5053 regarding secured claims.

(7) Section 380.24, which addressesthe priority granted to creditors whohave lost setoff rights due to the exerciseof the receivers right to sell or transferassets free and clear of such rights, has

been modified to make clear that theprovisions of that section do not affectthe provisions of the Dodd-Frank Act

relating to rights of netting with respectto qualified financial contracts.

(8) Section 380.31 addresses the scopeand applicability of the receivershipadministrative claims process byproviding that the claims process doesnot apply to claims against a bridgefinancial company or involving itsassets or liabilities, or extensions ofcredit from a Federal reserve bank or theFDIC to a covered financial company.

(9) Section 380.35(b)(2)(i) of the FinalRule permits the receiver to consider aclaim filed after the claims bar date ifthe claimant did not have notice of the

appointment of the receiver in time tofile its claim because the claim is basedon an act or omission of the receiverthat occurs after the claims bar date. TheProposed Rule addressed claims thatdid not accrue until after the claims

bar date. It was decided, however, thatthis was too broad because it couldcover contingent claims, which areaddressed in 380.39 of the Final Rule.

(10) Sections 380.50380.53 of theProposed Rule have been extensivelymodified to more fully protect the rightsof secured claimants. Property of a


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covered financial company will bevalued at the time of any proposeddisposition or use of the property. Asecured claimant may request thereceivers consent to exercise its rightsagainst its collateral, which the receiverwill grant unless it decides to use, sellor lease the collateral, in which case thereceiver must provide adequate

protection of the claimants securityinterest in the property.

C. Section-by-Section Analysis of theFinal Rule

1. Subpart AGeneral andMiscellaneous Provisions

Definitions. Section 380.1 of the FinalRule contains definitions of thefollowing terms of general applicabilityto part 380: allowed claim, Board ofGovernors, bridge financialcompany, compensation,corporation, covered financial

company, covered subsidiary,director, Dodd-Frank Act,employee benefit plan, insurancecompany, and senior executive.Some of these terms are terms that aredefined in the Act which were notincluded in the IFR or the ProposedRule, and others had been includedamong the substantive provisions ofthose rules but are now moved to 380.1 because those terms are, or may

be, used on more than one occasionthroughout part 380. All of thedefinitions are consistent with thelanguage of the Dodd-Frank Act. By andlarge, definitions that had been includedin the IFR and the Proposed Rule havenot been changed. The terms Board ofGovernors, Dodd-Frank Act andemployee benefits plan were addedfor ease of reference and the avoidanceof doubt. A clarifying change was madeto the definition of director to makeclear that the term includes individualsserving entities that may have adifferent legal form than a corporation,such as a limited liability company, ina capacity similar to a director for acorporation.

Few comments were received on

these definitions. One commenterargued that the definition ofcompensation should use only theprecise language of section 210(s)(3) ofthe Act, and not include any additionallanguage. The Proposed Rule providedgreater clarity to the industry byproviding a non-exclusive list of thetypes of compensation that would besubject to recoupment that is consistentwith the intent of section 210(s).Accordingly, no change to thisdefinition is being made in the FinalRule.

Section 380.2 is reserved; the contentof 380.2 of the IFR has been moved to 380.27 of the Final Rule and isdiscussed below.

Personal service agreements. Section380.3 of the Final Rule assures that anemployee who provides services to thecovered financial company afterappointment of the receiver, or to the

bridge financial company, will be paidfor such services according to the termsof any applicable personal serviceagreement, and such payment shall betreated as an administrative expense ofthe receiver. This provision does notrestrict the receivers ability to repudiatea personal services agreement, nor doesit impair the ability of the receiver tonegotiate different terms of employment

by mutual agreement. Section 380.3does not apply to senior executives ordirectors of a covered financialcompany and it does not limit thepower to recover compensation

previously paid to senior executives ordirectors under section 210(s) of theDodd-Frank Act and the regulationspromulgated thereunder.

Only one comment addressed thetreatment of personal serviceagreements under 380.3 of the IFR.That comment pointed out that thereference to covered subsidiaries in theIFR was confusing, because coveredsubsidiaries are, by definition, not inreceivership and therefore contracts towhich the subsidiary is a party cannot

be repudiated by the FDIC as receiverpursuant to section 210(c) of the Act.Section 380.3 of the IFR was intended

to address the possibility that anagreement entered into by a parentcompany may cover employees of anaffiliate or subsidiary of the coveredfinancial company. It is the intent of theFinal Rule that employees be paid forwork performed under a contract with acovered financial company or, ifapplicable, a bridge financial company,in accordance with the terms of theagreement until such time as thecontract is assumed by a third party orrepudiated by the FDIC as receiver. Tothe extent that the FDIC as receiver forthe covered financial company has the

power to exercise control over asubsidiary, it will ensure that employeesof the subsidiary continue to be paid inaccordance with the personal servicesagreement. However, the reference tocovered subsidiaries has been deletedfrom 380.3 in the Final Rule to clarifythat this section does not imply that theFDIC as receiver has the power torepudiate a contract entered into by acovered subsidiary nor does it have thepower to enforce the terms of such acontract except by virtue of its role asparent to such subsidiary, unless or

until the FDIC is appointed as receiverof a subsidiary.

As a technical revision to the IFR, 380.3 of the Final Rule does notinclude the definition of the termsenior executive as the IFR had. Thedefinition of that term has been movedinto the general definitions of 380.1. Inaddition, a reference is included in the

last sentence of 380.3(c) to the ruleregarding recoupment of executivecompensation included in this FinalRule at 380.7.

Section 380.4 is reserved as thecontent of that Proposed Rule has beenmoved to 380.39 and is discussed

below.Insurance company subsidiaries. The

IFR provides at 380.5 that where theFDIC acts as receiver for a direct orindirect subsidiary of an insurancecompany, the value realized from theliquidation of the subsidiary will bedistributed according to the prioritiesestablished in the Dodd-Frank Act andwill be available to the policy holders ofthe parent insurance company. Nocomments were received recommendingchanges to 380.5 of the IFR. The solerevision to that section in the Final Ruleis to include a reference to theregulations promulgated under section210(b)(1) of the Act that are included insubpart B of this Final Rule.

Liens on insurance company assets.Section 380.6 of the IFR limits theability of the FDIC to take liens oninsurance company assets and assets ofthe insurance companys coveredsubsidiaries under certain

circumstances after the FDIC has beenappointed as receiver. As discussed inthe preamble of the notice of proposedrulemaking with respect to this rule,section 204 of the Dodd-Frank Actprovides that in the event that the FDICas receiver of a covered financialcompany determines it to be necessaryor appropriate, it may provide fundingfor the orderly liquidation of coveredfinancial companies and coveredsubsidiaries by, among other things,making loans, acquiring debt,purchasing assets or guaranteeing themagainst loss, assuming or guaranteeing

obligations, making payments, orentering into certain transactions. Inparticular, pursuant to section 204(d)(4)of the Dodd-Frank Act, the FDIC isauthorized to take liens on any or allassets of the covered financial companyor any covered subsidiary, including afirst priority lien on all unencumberedassets of the covered financial companyor any covered subsidiary to securerepayment of any advances made.

Commenters to the IFR questioned thereference to liens on assets of an affiliateof a covered financial company as well


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as assets of a covered subsidiary. TheFDIC as receiver has clear authorityunder section 204(d)(4) of the Act totake a lien on the assets of the coveredfinancial company or any coveredsubsidiary to secure repayment of anytransactions conducted under thatsection. While section 203(e) of the Actcontemplates that the FDIC could be

appointed as receiver for an affiliate ofan insurance company that is not itselfa subsidiary, it is clear that uponappointment, the affiliate would becomea covered financial company, renderingthe reference to affiliates in 380.6superfluous. The Final Rule has beenrevised accordingly to eliminate thereference to affiliates of the coveredfinancial company and to make clearthat the rule applies only to coveredsubsidiaries of insurance companies.

Recoupment of Compensation.Section 380.7 of the Final Ruleimplements section 210(s) of the Dodd-

Frank Act, which authorizes the FDIC asreceiver to recoup compensation whena current or former senior executive ordirector is substantially responsiblefor the failed condition of a coveredfinancial company. The Final Ruleprovides, in pertinent part, that a seniorexecutive or director would be deemedsubstantially responsible if he or shefailed to conduct his or herresponsibilities with the degree of skilland care required by that position.Comments received on 380.7 of theProposed Rule sought clarification ormade recommendations regarding this

standard. Some comments took theposition that substantial responsibilityshould be based on state law orestablished legal standards. Onecommenter took the position thatsubstantial responsibility should exist

based solely on the failure of thecovered financial company with noinquiry into conduct. In response to thecomments, the Final Rule clarifies thestandard and provides that a seniorexecutive or director would be deemedsubstantially responsible if he or shefailed to conduct his or herresponsibilities with the degree of skill

and care an ordinarily prudent personin a like position would exercise undersimilar circumstances. The revisionclarifies that the standard of care thatwill trigger section 210(s) is a negligencestandard; a higher standard, such asgross negligence, is not required. In theevent that a covered financial companyis liquidated under Title II, the FDIC asreceiver will undertake an analysis ofwhether the individual has breached hisor her duty of care, including anassessment of whether the individualexercised his or her business judgment.

The burden of proof, however, will beon the former senior executive ordirector to establish that he or sheexercised his or her business judgment.State business judgment rules andinsulating statutes will not shift the

burden of proof to the FDIC or increasethe standard of care under which theFDIC as receiver may recoup

compensation.The Final Rule provides that, in

certain limited circumstances, a seniorexecutive or director would bepresumed to be substantiallyresponsible for the failed condition ofthe covered financial company. Somecommenters objected to the use of therebuttable presumption of substantialresponsibility that was based on theposition or the duties of the current orformer senior executive or director.Those commenters argued that apresumption based solely on anindividuals position in a company

would be a disincentive for anyindividual to take that position andwould be detrimental to the financialindustry. Other commenters objected tothe presumption of substantialresponsibility that was based on anindividuals removal from his or herposition under section 206 of the Act.One commenter argued that thepresumption exception for whiteknights was too narrow and wouldserve as a disincentive for individuals totake positions with financially impairedcompanies. The statutory language ofthe Dodd-Frank Act provides for therecoupment of compensation from

current or former senior executives ordirectors of covered financial companieswhen they have not performed theirduties and responsibilities. The use ofrebuttable presumptions for thoseindividuals under the limitedcircumstances described in theProposed Rule is aligned with the intentshown in the statutory language; thus,the presumptions remain unchanged inthe Final Rule.

Some comments requestedclarification of the procedure that would

be used for pursuing recoupment ofcompensation. The FDIC anticipates

that it will seek recoupment ofcompensation through the court systemusing a procedure similar to theprocedure that it currently uses when itseeks recovery from individuals whosenegligent actions have caused losses tofailed financial institutions. In thosesituations, the FDIC as receiverundertakes an investigation todetermine if there are meritorious andcost-effective claims and, if so, staffrequests authority to sue from the FDICBoard of Directors or the appropriatedelegated authority. Similarly, under

section 210(s) of the Act, the FDICanticipates that it will investigatewhether the statutory criteria forcompensation recoupment are met and,if so, staff will request authorization ofa suit for recoupment. The Final Rulereflects this procedure by indicating thatthe FDIC as receiver may file an actionto seek recoupment of compensation.

The Final Rule has a savings clauseto preserve the rights of the FDIC asreceiver to recoup compensation underall applicable laws.

Treatment of fraudulent andpreferential transfers. Section 380.9 ofthe Proposed Rule addressed the powersgranted to the FDIC as receiver insection 210(a)(11) of the Dodd-FrankAct to avoid certain fraudulent andpreferential transfers and sought toharmonize the application of thesepowers with the analogous provisions ofthe Bankruptcy Code so that thetransferees of assets will have the same

treatment in a liquidation under Title IIas they would in a bankruptcyproceeding.

One commenter noted that 380.9(b)(2) of the Proposed Ruleprovided that the term fixture shall beinterpreted in accordance with federal

bankruptcy law, and stated that abankruptcy court would look toapplicable non-insolvency law whendetermining what constitutes a fixture.The commenter pointed out thattypically under non-insolvency law, thelaw of the state in which a fixture islocated would govern the determination

of what constitutes a fixture, andsuggested that the FDIC need not applya federal rule to determine what afixture is for preference purposes. Byproviding in the Proposed Rule that theterm fixture is to be interpreted inaccordance with federal bankruptcylaw, it was intended that the term beinterpreted in the same manner as underfederal bankruptcy law. Thus, to theextent that bankruptcy courts continueto define fixture by reference toapplicable non-insolvency law,including state law, the same analysiswould be applied to define fixture

under 380.9. Therefore, the provisiondoes not create a new federal rule todefine fixture, and no clarifyingchange to the Final Rule is necessary.

2. Subpart BPriorities

Subpart B addresses the priority forexpenses and unsecured claimsestablished under section 210(b) of theAct. It organizes and clarifies provisionsthroughout the Act dealing with therelative priorities of various creditorswith unsecured claims against a failedfinancial company.


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2Claims for certain expenses incurred inconnection with the liquidation of a covered brokeror dealer that qualify for administrative expensepriority are not addressed in the Proposed or FinalRule because matters relating to the liquidation ofa covered broker-dealer under section 205(f) of theAct are required to be addressed in a separate rulebeing prepared jointly with the U.S. Securities andExchange Commission.

Priorities. Section 380.21 lists each ofthe eleven priority classes of claimsestablished under the Dodd-Frank Actin the order of its relative priority. Inaddition to the specified priorities listedin section 210(b) of the Act, the FinalRule integrates additional levels ofpriority established under section210(b)(2) (certain post-receivership

debt); section 210(a)(13) (claims for lossof setoff rights); and section 210(a)(7)(D)(post-insolvency interest).

Section 380.21(b) conforms themethod of adjusting certain paymentsfor inflation to the similar provisions ofthe Bankruptcy Code. Section 380.21(c)provides that each class will be paid infull before payment of the next priority,and that if funds are insufficient to payany class of creditors, the funds will beallocated among creditors in that class,

pro rata.Section 380.21 of the Final Rule

contains four changes from the languageof the Proposed Rule. The introductionto paragraph (a) now uses the definedterm allowed claims for consistencyand to clarify that this rule applies onlyto unsecured claims, including theunsecured portion of under-securedclaims. This change is in response to therequest of several commenters that thisimportant point be made even clearerand more express in recognition of themandate of section 210(b)(5) that section210 of the Act shall not affect a securedclaim except to the extent that thesecurity is insufficient to satisfy theclaim. Also, 380.21(a)(3) was modifiedto clarify that the class of claims for

amounts owed to the United Statesdoes not include obligations that meetthe definition of administrativeexpenses in 380.22. A correspondingclarification has been made to 380.23.A technical change to 380.21(a)(4) and(5) substitutes the word within for thephrase not later than to make clearthat the relevant employees claimsmust arise during the time periodwithin 180 days before the date of theappointment of the receiver.

A comment also requestedclarification of the impact of contractualagreements on priorities. The last

sentence of 380.21(c) is added inresponse to that comment, to make clearthat enforceable contractualsubordination agreements will berespected. This is consistent withsection 510(a) of the Bankruptcy Code,which provides that subordinationagreements enforceable underapplicable non-bankruptcy law will berespected by the trustee in bankruptcy.

Administrative expenses of thereceiver. Section 380.22 of the ProposedRule expanded and clarified thestatutory definition of the term

administrative expenses of thereceiver by consolidating variousstatutory references to administrativeexpenses in a single section and bymaking clear that administrativeexpenses of the receiver can includecosts and expenses incurred by the FDICprior to the appointment as receiver, aswell as post-appointment expenses if

the expenses are necessary andappropriate to facilitate the smooth andorderly liquidation of the coveredfinancial company.2

The changes to 380.22 of theProposed Rule are intended solely toprovide clarity. A commenterquestioned how expenses of the receivermight pre-date the appointment of thereceiver. The change to pre- and post-failure costs and expenses of the FDICin connection with its role as receiverclarifies that costs incurred inanticipation of and preparation for therole as receiver are administrative

expenses of the receiver. Similarly,comments revealed some confusionabout debt accorded super-prioritystatus ahead of administrative expensesunder 380.21(a)(1) of the ProposedRule. The language of the Final Rulemore closely tracks the statutorylanguage with respect to debt thatqualifies for super-priority status.

Amounts owed to the United States.Section 380.23 of the Proposed Ruleestablished a definition of amountsowed to the United States that areentitled to be paid at the level of priorityimmediately following administrativeexpenses. It defined that class of claimsto include amounts advanced by theU.S. Treasury, or by any otherdepartment, instrumentality or agencyof the United States, whether such sumsare advanced before or after theappointment of the receiver. It expresslyincluded advances by the FDIC forfunding of the orderly liquidation of thecovered financial company pursuant tosection 204(d)(4) of the Act but alsoincluded other sums advanced bydepartments, agencies andinstrumentalities of the United Statessuch as payments on FDIC corporateguarantees, including the Temporary

Liquidity Guarantee Program andunsecured claims for net realized losses

by a federal reserve bank in connectionwith loans made under section 13(3) ofthe Federal Reserve Act, 12 U.S.C. 343,

and unsecured accrued and unpaidtaxes owed to the United States.

Several comments requestedclarification with respect to therelationship between pre- and post-receivership administrative expensesincurred by the FDIC that weredescribed in 380.22 of the ProposedRule and are included in the

administrative expense class of claimsunder 380.21(a)(2). For the sake ofclarity, 380.23 of the Final Rule statesthat amounts owed to the United Statesdo not include any amounts included inthe administrative expense classes ofclaims at 380.21(a)(1) and (a)(2).

All of the comments specificallyaddressing 380.23 of the ProposedRule reflected concerns that expresslyincluding amounts owed to alldepartments, agencies andinstrumentalities of the United Statesin the regulatory definition of amountsowed to the United States was vagueand potentially overbroad. Clarificationwas requested with respect to specificexamples of amounts that might bedeemed to be included in the broaddefinition under the Proposed Rule,such as amounts owed to the PensionBenefit Guaranty Corporation arisingout of underfunded pension obligations,amounts owed to the EnvironmentalProtection Agency arising out ofsuperfund cleanup obligations, and feespayable to the Securities and ExchangeCommission or other regulatoryagencies, to name a few. In the FinalRule, the phrase departments, agenciesand instrumentalities of the United

States found in the Proposed Rule isomitted in favor of the simpler statutoryreference to the United States. Thischange is not intended to limit thedefinition strictly to amounts owed tothe U.S. Treasury and the Final Ruleexpressly provides in 380.23(a) thatamounts owed to agencies orinstrumentalities other than the U.S.Treasury for certain purposes will beincluded as amounts owed to theUnited States.

Section 380.23(a) adds language tomake clear that the priority for amountsowed to the United States relates to

amounts advanced in connection withthe purposes and mandates of Title II ofthe Act, namely, to conduct the orderlyresolution of a covered financialcompany, to avoid or mitigate adverseconsequences to the financial stabilityof the United States arising out of thefailure of the covered financial companyand to ensure that outstanding taxobligations to the U.S. Treasury arerepaid to protect the taxpayers. Theseinclude obligations such as advancesunder the Temporary LiquidityGuaranty Program that was created by


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3For example, section 204(d)(4) (funding fororderly liquidation), section 210(c)(6)(C) (certainadvances from the SIPC Fund), and section1101(a)(6)(E) (net realized losses on certain loans bya Federal reserve bank) all are specificallydesignated as receiving the priority for amountsowed to the United States.

4Although not expressly stated in this rule,amounts paid to customers of a covered brokerdealer or to the Securities Investors ProtectionCorporation (SIPC) pursuant to section 205(f) areentitled to the same priority as amounts owed to theUnited States pursuant to section 210(b)(6). Theseissues will be addressed in a joint rulemaking withthe SEC as required by section 205(h) of the Act.

the FDIC to address a systemic liquiditycrisis, repayment of the amount of anydebt owed to a Federal reserve bankrelated to loans made through programsor facilities authorized under theFederal Reserve Act, 12 U.S.C. 221 etseq., as well as payment of unpaidunsecured federal income taxobligations of the covered financial

company.Although the language of the Dodd-

Frank Act does not elaborate on theintent of the phrase amounts owed tothe United States, it is clear that it isnot intended to include all amountsowed to the United States of any kindor nature. The fact that the Actspecifically mentions the inclusion ofsome obligations,3 suggests that othersmust be excluded, and that it is not theintent of the Act to elevate liabilities forunsecured amounts due to governmentdepartments, agencies orinstrumentalities arising in the covered

financial companys ordinary course ofbusiness over other general or seniorliabilities. Thus, the Final Rule includesa new paragraph (b) to establish thegeneral rule that obligations incurredprior to the appointment of the receiverthat are unrelated to the particularmandates of the Dodd-Frank Act willnot be included among the class ofclaims described in 380.21(a)(3). TheFinal Rule expressly provides thatunsecured obligations such as anyunsecured portion of a Federal HomeLoan Bank advance or payments dueunder guarantees from governmentsponsored entities such as the Federal

National Mortgage Association or theFederal Home Loan MortgageCorporation are not included amongamounts owed to the United States.These exclusions were identified in thepreamble to the Proposed Rule.Similarly, the Final Rule provides thatunsecured unpaid filing or registrationfees due to any federal agency wouldnot be classified as amounts owed tothe United States because they areunrelated to the mandates of the Dodd-Frank Act. These unsecured amountswould be included among the priorityclass otherwise applicable to such

claims under 380.21(a)(7).New paragraph (a)(5) in 380.23 wasadded to clarify that governmentdepartments, agencies, andinstrumentalities may, for avoidance ofdoubt, expressly designate amountsadvanced as amounts intended to be

included as amounts owed to the UnitedStates for the purpose of the prioritiesestablished in 380.21. Suchdesignation would be used in the caseof advances to a financial company toavoid or mitigate adverse effects on thefinancial stability of the United States orto liquidate a covered financialcompany.4 Any such designation would

be in writing by the appropriatedepartment, agency or instrumentalityin a form acceptable to the FDIC.

In addition, some commentersrequested clarification that the FinalRule does not affect the rights of securedcreditors. No change to the rule isnecessary to clarify that point. Thepriorities established under section210(b) of the Act relate only tounsecured claims and do not affect therights of secured creditors, which areaddressed in 380.50380.53 of theFinal Rule. To underscore this point, thereference to secured or unsecured

amounts advanced under section 204(d)of the Act in 380.23(a)(1) of theProposed Rule has been deleted in theFinal Rule. Although the text of section204(d) of the Act refers both to thepriorities under section 210(b) and totaking liens to secure amountsadvanced, it is a clearer, more consistentapproach to treat all secured claimsunder the rules applicable to suchclaims and not under the prioritiesapplicable to unsecured claims.

Finally, some commenters expressedconcern that the definition of amountsowed to the United States may havethe effect of increasing the amount of

risk-based assessments that may becharged by the FDIC under section210(o)(1)(B) of the Dodd-Frank Act. Thatprovision authorizes and directs theFDIC to impose risk-based assessmentson eligible financial companies if suchassessments are necessary to pay in fullthe obligations issued by the [FDIC] tothe Secretary [of the U.S. Treasury]under [Title II] within 60 months of thedate of issuance of such obligations.The priority of payments applied by thereceiver in the liquidation of the assetsof the covered financial company isindependent of the assessments

imposed by FDIC in its corporatecapacity in exercising its authorityunder section 210(o) of the Act. Whileonly the obligations that are expresslyincluded in section 210(a)(1)(B) of theAct are entitled to the benefit of the

assessments, this does not constitute apreferential payment to a similarlysituated creditor because it is imposedpursuant to a statutory requirement andcannot be subject to clawback undersection 210(o)(1)(D)(i).

Paragraph (c) of 380.23 isunchanged. It acknowledges that theUnited States may subordinate its right

to repayment behind any class ofcreditors by express written consent,provided that in any event all amountsdue to the United States must be paidprior to any payment to equity holdersof the covered financial company.Absent such express writtensubordination, all amounts owed to theUnited States will be paid at the priorityunder 380.21(a)(3), regardless ofwhether they are characterized as debtor equity on the books of the coveredfinancial company.

Claims for loss of setoff rights. Section380.24 of the Final Rule addresses theclaims of creditors who have lost a rightof setoff due to the exercise of thereceivers right to sell or transfer assetsof the covered financial company freeand clear in a manner consistent withthe express provisions of the Act. Anyclaim for the loss of setoff rights is givena priority above other general unsecuredcreditors but below administrativeclaims, amounts owed to the UnitedStates and certain employee-relatedclaims.

Several comments to 380.24 pointedout that the treatment of setoff under theProposed Rule is different from thepractice in bankruptcy and took issue

with the statement in the preamble tothe Proposed Rule that treatment ofsetoff claims under the Dodd-Frank Actshould normally provide value tosetoff claimants equivalent to the valueof setoff under the Bankruptcy Code.These commenters agreed with thestatement in the preamble that in

bankruptcy setoff rights are functionallyequivalent to a secured claim andpointed out that this is a significantlyhigher place in the preference schemethan the super-priority generalunsecured creditor status that claimsarising out of loss of setoff rights are

granted under the Dodd-Frank Act. Incontext, the quoted sentence points outthat it is anticipated that in most casesthere will be sufficient funds to paycreditors with claims arising out of lossof setoff rights in a Title II orderlyliquidation, Dodd-Frank orderlyresolution, not that the outcome iscertain to be identical under eitherpriority scheme. The Dodd-Frank Actprovides that a creditor who has lost aright of setoff due to the exercise of thereceivers right to sell or transfer assetsof the covered financial company free


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and clear of the claims of third partiespursuant to section 210(a)(12)(F) isentitled to a claim senior to allunsecured liabilities other than thosedescribed in section 210(b)(A)(D) of theAct (i.e., immediately behind the classof general unsecured creditors andsenior liabilities described in 380.21(a)(7)). The language of the

Proposed Rule respected this clearexpression of intent by the legislature,and no change to this language is madein the Final Rule with respect to thepriority accorded to claims arising fromloss of setoff rights.

Commenters also sought clarificationthat 380.24 does not affect thecontractual rights of netting with respectto qualified financial contracts that areprotected under the Dodd-Frank Act.Section 210(c)(8) of the Act providesthat qualified financial contracts areexempt from provisions of the Actlimiting any right to offset in certain

circumstances. Accordingly, a newparagraph (c) was added to 380.24 inthe Final Rule to clarify that theprovisions of this section are notintended to disturb such rights withrespect to qualified financial contracts.If a qualified financial contract issubject to a master agreement, suchmaster agreement will be treated as asingle agreement as provided in section210(c)(8)(D)(viii).

Post-insolvency interest. Section380.25 of the Final Rule establishes apost-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 averagediscount rate set on the three-monthU.S. Treasury bill, which is consistentwith the post-insolvency interest rateapplied to claims under section11(d)(10)(C) of the Federal DepositInsurance Act (the FDI Act), 12 U.S.C.1821(d)(10)(C). (See 12 CFR 360.7.)

Six comments pertaining to 380.25of the Proposed Rule were received.Commenters variously suggested the useof the federal rate as is the practice insome bankruptcy cases, or the contractrate where one is specified, or anyspecified contract rate other than a

default rate. Two commenters agreedthat the use of a post-insolvency interestrate based on the average discount ratefor the three-month Treasury bill isappropriate, at least where no contractrate is provided. One commenterpointed out that given the fact that post-insolvency interest is paid only after allcreditors have been fully paid, theprovision will rarely, as practicalmatter, materially affect creditors. Aswas recognized by some commenters,there is no express rule for treatment ofpost-insolvency interest under the

Bankruptcy Code and applicable caselaw is not uniform. The Final Ruleadopts the language of the ProposedRule with respect to the method ofcalculating the post-insolvency interestrate for unsecured claims withoutchange, in favor of the consistency andease of administration of the rate thathas been applied by the FDIC with

respect to claims under the FDI Act.Bridge financial companies. Section

380.26 was included in the ProposedRule during the early stages of therulemaking process because of theimportance of addressing two issuesthat were the subject of several requestsfor clarification. First, it made clear thatany contract or agreement purchasedand assumed or entered into de novo bythe bridge financial company becomesthe obligation of the bridge financialcompany and that the bridge financialcompany shall enforce and observe theterms of any such contract or agreement.

Secondly, it stated that any remainingassets or proceeds of the bridge financialcompany after payment of alladministrative expenses and otherclaims shall be distributed to thereceiver of the related covered financialcompany for the benefit of the creditorsof that covered financial company.

Commenters have continued to callfor additional clarifications with respectto the treatment of bridge financialcompanies and their assets andliabilities. A more expansive treatmentof this topic is beyond the scope of theFinal Rule and will be the topic of afuture rulemaking. Accordingly, other

than two minor changes to the languageintended simply to clarify the text, theFinal Rule is unchanged from theProposed Rule. The two minor changesare the use of the indefinite any inlieu of the definite article a beforecontract or agreement giving rise tosuch asset or liability in paragraph (a),and the use of the defined termallowed claim in place of the wordclaim in the same paragraph. Nosubstantive changes to the Final Ruleare intended by these corrections.

Similarly situated creditors. Section380.27 contains the provision found at

380.2 of the IFR addressing thetreatment of similarly situated creditors.This provision makes clear that certaincategories of creditors, includingcreditors holding unsecured debt with aterm of more than 360 days, will not begiven additional payments compared toother general trade creditors or anygeneral or senior liability of the coveredfinancial company nor will exceptions

be made for favorable treatment ofholders of subordinated debt,shareholders or other equity holders.Although some commenters have

supported this rule, others haveconsistently objected to it through tworounds of comments. These commentsreiterated the objections to this rule thatwere considered in implementing theIFR. Accordingly, the Final Rulecontains no change to the language ofthe IFR now set forth in 380.27(a) and(b). These provisions are clearly

consistent with the mandate of theDodd-Frank Act expressed in sections204(a) and 210(a)(1)(M) that the orderlyresolution of covered financialcompanies is to be undertaken in amanner that ensures that the creditorsand shareholders of a covered financialcompany will bear the losses of thecovered financial company.

Paragraph (c) of 380.2 of the IFR hasbeen deleted in its entirety from 380.27 of the Final Rule, and is movedto 380.50(b), as the subject of thetreatment of secured creditors isaddressed in 380.50380.53.

Although not impacting the text of theFinal Rule, one new topic wasaddressed in a joint comment letter fromtwo trade associations representing the

banking and securities industries. Thisletter suggested an alternative approachfor the orderly resolution ofsystemically important financialinstitutions that would provide for theexchange of certain subordinated debtfor equity. The joint working paperprepared by these trade associationsdescribes a recapitalization plan that theFDIC could implement following itsappointment as receiver of a coveredfinancial company via the transfer of the

viable assets and businesses of a failedinstitution into a bridge financialcompany established after failure and aconversion of certain creditors of thefailed institution into equity holders inthe bridge financial company. In theview of the commenters, this approachwould neither be considered atraditional bail-in recapitalization norcontingent capital, nor would it requirea taxpayer-funded bailout. Thecommenters suggested that thisapproach might also facilitate thediscussion of the resolution of a failedcross-border financial institution. No

change to the Final Rule is made inconnection with this proposal, as anyexchange of debt for equity in the bridgefinancial company would beaccomplished pro rata and inaccordance with the prioritiesestablished under 380.21.Furthermore, although this approachmay prove to be useful in conducting anorderly liquidation of a coveredfinancial company in certaincircumstances, comment on thisparticular approach is outside the scopeof the Final Rule. This letter may,


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however, be seen as an example of thevalue generated by constructivedialogue between the private financialmarkets and the federal government ontopics such as this one.

3. Subpart CReceivershipAdministrative Claims Process

Subpart C of the Final Rule adopts

and interprets where necessary theadministrative claims determinationprocess provided for in the Act.

Receivership administrative claimsprocess. Section 380.30 of the FinalRule reflects the authorization under theDodd-Frank Act that the FDIC asreceiver of the covered financialcompany shall determine all claims inaccordance with the statutoryprocedures set forth in sections210(a)(2)(5) of the Act and with theregulations promulgated by the FDIC.

Scope & Applicability. Section 380.31of the Final Rule addresses the scope ofthe claims process. It clarifies that theclaims process will not apply to a bridgefinancial company or to any extensionof credit from a Federal reserve bank orthe FDIC to a covered financialcompany. Commenters soughtclarification that the claims processdoes not affect the contractual rights ofnetting and setoff with respect toqualified financial contracts that areprotected under the Dodd-Frank Act.This concern is addressed in 380.51(g)of the Final Rule, which exceptsqualified financial contracts from therequirement to seek the consent of thereceiver before exercising contractual

rights against property of the coveredfinancial company. If a party to aqualified financial contract has anunsecured claim after terminating thecontract and liquidating any collateral,such claim would be subject to theclaims process.

The definitions in 380.31 of theProposed Rule have been moved intothe general definitions of 380.1 of theFinal Rule.

Claims bar date. Section 380.32 of theFinal Rule follows section 210(a)(2)(B)of the Dodd-Frank Act authorizing thereceiver to establish a claims bar date

by which creditors of the coveredfinancial company are to file theirclaims with the receiver. The claims bardate must be identified in both thepublished notices and the mailednotices required by the statutoryprocedures. Section 380.32 clarifies thatthe claims bar date is calculated fromthe date of the first published notice tocreditors, not from the date ofappointment of the receiver.

Notice requirements. Section 380.33of the Final Rule follows the statutoryprocedures for notice to creditors of the

covered financial company. As requiredby the statute, upon its appointment asreceiver of a covered financial company,the FDIC as receiver will promptlypublish a notice; subsequently, thereceiver will publish a second and thirdnotice one month and two months,respectively, after the first notice ispublished. The notices must inform

creditors to present their claims to thereceiver, together with proof, by no laterthan the claims bar date. The Final Ruleprovides that the notices shall bepublished in one or more newspapers ofgeneral circulation in the market wherethe covered financial company had itsprincipal place of business. Inrecognition of the publics growingreliance on communication using theInternet as well as the prevalence ofonline commerce, the FDIC may alsopost the notice on its public website.Several comments suggested thatnotices be published in certain specific

financial news media both domesticallyand abroad. The Final Rule does notadopt this suggestion; the FDIC willprovide notices in specific media thatwill be appropriate under the particularcircumstances.

Discovered claimants. In addition topublishing the notice described in 380.33(a), the receiver also must maila notice that is similar to the publicationnotice to each creditor appearing on the

books and records of the coveredfinancial company. The mailed noticewill be sent at the same time as the firstpublication notice to the last address ofthe creditor appearing on the books or

in any claim filed by a claimant. TheFinal Rule supplements this procedure

by providing that after sending theinitial mailed notice, the receiver maycommunicate by electronic media (suchas email) with any claimant who agreesto such means of communication. Thisprovision will facilitate the filing ofclaims electronically if a claimantchooses to do so.

Section 380.33(d) of the Final Ruleclarifies the treatment of creditors thatare discovered after the initialpublication and mailing has taken place.The FDIC as receiver will mail a notice

similar to the publication notice to anyclaimant not appearing on the booksand records of the covered financialcompany no later than 30 days after thedate that the name and address of suchclaimant is discovered. If the name andaddress of the claimant is discoveredprior to the claims bar date, suchclaimant will be required to file theclaim by the claims bar date. There may

be instances when notice to thediscovered claimant is sent too close

before the claims bar date to reasonablypermit timely filing, however. In such a

case, the claimant may invoke thestatutory exception for late-filed claimsset forth in section 210(a)(3)(C)(ii) of theDodd-Frank Act in order to have itsclaim considered by the receiver.

Because section 210(a)(2)(C) of theDodd-Frank Act does not distinguish

between claimants discovered beforeand claimants discovered after the

claims bar date, the statute literallywould require the receiver to mail anotice of the claims bar date to aclaimant discovered after such date.However, such a discovered claimantcannot file a claim timely if the claims

bar date has already passed. Therefore,the Final Rule provides that a claimantdiscovered after the claims bar date will

be given 90 days to file a claim. Thistime frame is consistent with the timeframe set forth in section 210(a)(2)(B) ofthe Dodd-Frank Act, which provides forthe claims bar date to be not less than90 days after the first publication of the

notice to creditors. The receiver willdisallow any claim filed by such a late-discovered claimant after the 90-dayperiod, however.

Some comments suggested thatclaimants discovered within 30 days

before the claims bar date should not berequired to submit a claim by the claims

bar date but given additional time to filea claim. This suggestion is unnecessary

because the Dodd-Frank Acts late-filedclaim exception (see section210(a)(3)(C)(ii)) encompasses claimantswho are notified before the claims bardate but do not have sufficient time toprepare and file a claim before such

date. In such a case, the claimant mustshow that it did not have notice of theappointment of the receiver in time tofile by the claims bar date.

Procedures for filing claims. Section380.34 of the Final Rule providesguidance to potential claimantsregarding certain aspects of filing aclaim. The FDIC as receiver hasdetermined to provide creditors withinstructions on how to file a claim inseveral different formats. These willinclude providing FDIC contactinformation in the publication notice,providing a proof of claim form and

filing instructions with the mailednotice, and posting a link to the FDICsnon-deposit claims processing web site.A claim will be deemed filed with thereceiver as of the date of postmark if theclaim is mailed or as of the date ofsuccessful transmission if the claim issubmitted by facsimile or electronically.

This section also confirms that eachindividual claimant must submit itsown claim and that no single party mayassert a claim on behalf of a class oflitigants. On the other hand, a trusteenamed or appointed in connection with


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a structured financial transaction orsecuritization is permitted to file a claimon behalf of the investors as a group

because in such a case the trusteelegally owns the claim. The suggestionthat an agent bank in a syndicated loanarrangement be permitted to file a claimon behalf of the lender group wasrejected because each lender in a

syndication arrangement has contractualprivity with the borrower and thereforeshould be required to file a claim on itsown behalf. The Final Rule follows thestatutory provision that the filing of aclaim constitutes the commencement ofan action for purposes of any applicablestatute of limitations and does notprejudice a claimants right to continueany legal action filed prior to the dateof the receivers appointment. The FinalRule also clarifies that the claimantcannot continue its legal action untilafter the receiver determines the claim.

Determination of claims. Section

380.35 of the Final Rule follows therequirements of section 210(a)(3) of theDodd-Frank Act authorizing the receiverto allow and disallow claims. The FDIChas added a clarifying clause in theFinal Rule to be consistent with section210(a)(3)(D)(iii) of the Act, whichexcludes any extension of credit from aFederal reserve bank or the FDIC to acovered financial company.

Late-filed claim exception. Section210(a)(3)(C) of the Dodd-Frank Actinstructs the receiver to disallow anyclaim that is filed after the claims bardate, subject to an exception for certainlate-filed claims. Under this exception,

a claim filed after the claims bar datemay be considered by the receiver if (i)the claimant did not have notice of theappointment of the receiver in time tofile by the claims bar date and (ii) theclaim is filed in time to permit payment

by the receiver. As in the ProposedRule, 380.35(b)(2) of the Final Ruleincorporates the statutory exception.

Some comments suggested that anexcusable neglect exception to late-filed claims similar to the BankruptcyCode should be used. This suggestion isinapposite because, as discussed, theDodd-Frank Acts late-filed claim

exception encompasses claimants whoare notified before the claims bar datebut do not have sufficient time toprepare and file a claim before suchdate. In such a case, the claimant mayshow that it did not have notice of theappointment of the receiver in time tofile by the claims bar date. Congressintended for late-filed claims to bedisallowed unless the claimant qualifiesfor the late-filed claim exception. (Seesection 210(a)(3)(C) of the Act.)

One comment noted that undersection 726(a) of the Bankruptcy Code,

late-filed claims are paid ahead ofclaims for post-petition interest anddistributions to the holders of equityinterests. It was suggested that a similartreatment be adopted for the payment oflate-filed claims in covered financialcompany receiverships. This suggestioncannot be adopted because Congress hasestablished the order of priority of

claims in the Dodd-Frank Act and theFDIC has not been given the authorityto alter that priority scheme.

Section 380.35(b)(2)(i) has beenrevised in the Final Rule in order toaccommodate specifically claims basedon an act or omission of the receiver,such as a repudiation or breach of acontract, that occurs after the claims bardate. Section 210(a)(9)(D)(ii) of theDodd-Frank Act deprives a court ofjurisdiction over any claim relating toany act or omission of the FDIC asreceiver unless the claimant firstcomplies with the receivership

administrative claims process. A partyto a contract that is repudiated orbreached by the receiver after the claimsbar date, however, would be unable totimely file a claim and would nottechnically qualify for the statutory late-filed claim exception because it would

be unable to show that it did not havenotice of the appointment of thereceiver prior to the claims bar date;accordingly, this party could neithercomply with the claims process norhave a court determine its claim. Inorder to provide relief to a party in thissituation, the Final Rule permits thereceiver to consider a claim filed after

the claims bar date if the claim is basedon an act or omission of the receiverthat occurs after the claims bar date. Inthe Proposed Rule, the late-filed claimexception had been expanded toencompass any claim that did notaccrue until after the claims bar date.After consideration, it was determinedthat this provision would have been too

broad because it could be read toencompass contingent claims which areaddressed separately in 380.39.

Decision period. Section 380.36 of theFinal Rule provides that under thestatute the receiver must notify a

claimant of its decision to allow ordisallow a claim prior to the 180th dayafter the claim is filed. The Final Rulealso provides that the claimant and thereceiver may extend the claimsdetermination period by mutualagreement in writing. In accordancewith the statute, the receiver must notifythe claimant regarding its determinationof the claim prior to the end of theextended claims determination period.

Notification of determination. Asrequired by section 210(a)(3)(A)(i) of theDodd-Frank Act, 380.37 of the Final

Rule provides that the receiver willnotify the claimant that the claim isallowed or disallowed. The notificationwill be mailed to the claimant as setforth in section 210(a)(3)(A)(iii) of theAct, unless the claimant has filed itsclaim electronically, in which case thereceiver may use electronic media forthe notification. If the receiver disallows

the claim, the notification will providethe reason(s) for the disallowance andalso advise the claimant of theprocedure for filing or continuing anaction in court.

The Final Rule reiterates theprovisions of section 210(a)(3)(A)(ii) ofthe Dodd-Frank Act that if the receiverfails to notify the claimant of anydisallowance within 180 days after theclaim is filed, or the end of anyextension agreed to by the claimant, theclaim will be deemed to be disallowed.The claimant may then file or continuean action in court as provided in section

210(a)(4) of the Act. The Final Rule hasbeen revised to cite the statutoryauthority for this provision. Commentson this aspect of the rule suggested thatafter 180 days the claim should bedeemed to be allowed instead ofdisallowed. Other comments suggestedthat the receiver should provideaffirmative notification of thedisallowance of a claim at the end of theclaims determination period. Thesesuggestions cannot be adopted becausethey are contrary to the provisions of theAct. In section 210(a)(3)(D)(ii) of theAct, Congress adopted the approach thatthe failure to notify the claimant of a

disallowance within 180 days after theclaim is filed is deemed to be adisallowance of the claim in order toimpose a clear and reasonable time limiton the receivers consideration ofclaims. Without such a time limit, theclaims procedure would be inadequateand not subject to exhaustion as aprerequisite for judicial determination,which would be contrary to the intentof Congress. Once the claimant entersthe receivership claims process by filinga claim, the claimant is on notice of thestatutory provisions governing thatprocess and will bear the responsibility

to monitor the claims determinationperiod in order to timely file or continuea lawsuit with respect to the claim.

Procedures for seeking judicial reviewof disallowed claim. Section 380.38 ofthe Final Rule implements the statutoryprocedures for a claimant to seek ajudicial determination of its claim afterthe claim has been disallowed orpartially disallowed by the FDIC asreceiver. Consistent with section210(a)(4) of the Dodd-Frank Act, aclaimant may (a) file a lawsuit on itsdisallowed claim in the district court


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where the covered financial companysprincipal place of business is located, or(b) continue a previously pendinglawsuit.

The Final Rule clarifies that if theclaimant continues a previously filedaction, the claimant may continue suchaction in the court in which the casewas pending before the appointment of

the receiver, resolving any uncertaintywhether the action should becontinued in the district court wherethe covered financial companysprincipal place of business is located.(In the case of an action pending in statecourt, the receiver would have theauthority to remove the action to federalcourt if it chose to do so.) Somecomments suggested that the FDICshould designate the district courtwhere the covered financial companysprincipal office is located as theexclusive forum for judicial review ofclaims. The FDIC must decline to adopt

this suggestion; as discussed, the FDICmust follow the established statutoryscheme and cannot alter courtjurisdiction or venue when these issueshave been decided by Congress.

As provided by statute, 308.38(c) ofthe Final Rule provides that theclaimant has 60 days to commence orcontinue an action regarding thedisallowed claim. The time period forcommencing or continuing a lawsuitwould be calculated, as applicable, fromthe date of the notification ofdisallowance, the end of the 180-dayclaims determination date, or the end ofthe extended determination date, if any.

If a claimant fails to file suit on a claim(or continue a pre-receivership lawsuit)

before the end of the 60-day period, theclaimant will have no further rights orremedies with respect to the claim. Thistime period is not subject to a tollingagreement between the FDIC and theclaimant. The Final Rule affirms thatexhaustion of the administrative claimsprocess is a jurisdictional prerequisitefor any court to adjudicate a claimagainst a covered financial company orthe receiver, as provided in section210(a)(9)(D) of the Dodd-Frank Act.

Provability of claims based on

contingent obligations. Section 380.39of the Final Rule addresses contingentclaims, which was previously thesubject of 380.4 of the IFR. The holderof a contingent claim against thecovered financial company will berequired to file its claim by the claims

bar date. Section 380.39(a) provides thatthe receiver will not disallow a claimsolely because the claim is based on acontingent obligation. Instead, thereceiver will estimate the value of acontingent claim as of the date of theappointment of the receiver. If the

receiver repudiates a contingentobligation, repudiation damages shall beno less than the estimated value of theclaim as of the date of the receiversappointment. Comments suggested thatany estimation of the value of acontingent claim be delayed until justprior to a final distribution by thereceiver. This approach would be

inconsistent with the statute becausesection 210(a)(3)(A) of the Dodd-FrankAct instructs the receiver to determinewhether to allow a claim no later than180 days after the claim is filed, subjectto any extension agreed to by theclaimant. Therefore, in accordance withthe statute, the receiver will estimate thevalue of a contingent claim before theend of either the 180-day period

beginning on the date the claim is filedor any mutually agreed-upon extensionof this time period. Unless thecontingency becomes absolute and fixedprior to the receivers determination of

the estimated value, the estimated valuewill be recognized as the allowedamount of the claim. The estimatedvalue of the contingent claim willrepresent the receivers determination ofthe claim for purposes of the exhaustionof administrative remedies by theclaimant prior to seeking a judicialdetermination of the claim.

Secured claims. Because section210(b)(5) of the Dodd-Frank Actprovides that section 210 of the Dodd-Frank Act, which sets forth the powersand duties of the FDIC acting as receiverof a covered financial company, shallnot affect secured claims or security

entitlements in respect of assets orproperty held by the covered financialcompany, the Final Rule has beenrevised to more effectively safeguard therights of secured claimants. Theapproach taken in the Final Rule shouldprovide more legal certainty for thesecured lenders of a systemicallyimportant financial institution.

A number of comments regarding theProposed Rule expressed concernsabout the valuation of property used ascollateral, the ability of a securedclaimant to exercise its rights against itscollateral or to obtain adequate

protection of its interest and the needfor expedited judicial review of actionsby the receiver affecting a securedclaimant. The Final Rule containsseveral revised provisions to addressthose concerns, satisfy the statutorydirective not to affect secured claimsand harmonize with the relevantprovisions of the Bankruptcy Code.With respect to judicial review,however, harmonization with theBankruptcy Code is not possible. Incontrast to a case under the BankruptcyCode, in which a debtors or trustees

actions are subject to prior approval bya court, a receivership of a coveredfinancial company is an administrativeprocess conducted by the FDIC asreceiver. Under the Act, courtjurisdiction is limited and subject toexhaustion of the receivership claimsprocess. A claimant may have its day incourt but only after the receiver has first

made a determination regarding theclaim or the claimants rights.

Determination of secured claims.Section 380.50 has been revised in theFinal Rule to model Bankruptcy Codesection 506. Section 380.50(a) affirmsthat under section 210(a)(3)(D)(ii) of theDodd-Frank Act, a claim is secured tothe extent of the value of the propertysecuring the claim by incorporating theprinciple that a claim that is secured byproperty of the covered financialcompany may be treated as anunsecured claim to the extent that theclaim exceeds the fair market value of

the property. Section 380.50(b) providesthat the fair market value of suchproperty shall be determined in light ofthe purpose of the valuation and of theproposed disposition or use of theproperty and at the time of the proposeddisposition or use. To illustrate, if asecured claimant requests the receiversconsent to obtain possession of orexercise control over property thatsecures the claim, the receiver wouldvalue the property at the time of therequest. If the receiver proposes to sellproperty that is subject to a securityinterest, the property will be valued atthe time of the sale. By not specifying

a particular point in time (such as thedate of appointment of the receiver)when property will be valued, theproblem of potential windfalls to eitherthe secured claimant or the receivershould be avoided. The approach takenshould provide more accuratevaluations, protect the rights of securedcreditors, and provide flexibility for thereceiver.

Recovery of fees, etc. Section380.50(c) provides that the receiver mayrecover from property subject to asecurity interest any reasonable andnecessary costs and expenses of

preserving or disposing of the propertyto the extent the claimant is benefitedthereby. When provided for byagreement or State law, claims forinterest, fees, costs, and charges aresecured claims to the extent that theproperty has sufficient value to coverthem. Section 380.50(d) recognizes thatif the value of property subject to asecurity interest is greater than theamount of the claim, the claimant will

be allowed, to the extent of the value ofthe property, interest and anyreasonable fees, costs, or charges


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