FDIC Board Issues Proposed Rule on Dodd-Frank Resolution Authority
The FDIC issued a press release on October 12, 2010, announcing that the Board of the FDIC had approved a proposed rule clarifying how the agency would, as receiver of a failing financial company that poses significant risk to the financial stability of the United States, treat certain creditor claims under the new orderly liquidation authority granted to the FDIC by Congress in the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Among the issues addressed in Notice of Proposed Rulemaking (NPR) is the availability of additional payments to creditors. The NPR proposed to absolutely bar any additional payments to holders of long-term senior debt, subordinated debt, or equity interests that would result in those creditors recovering more than other creditors entitled to the same priority of payments under the law. Under the proposed rule, in no event may taxpayer money be used to cover losses associated with the failure of a large financial firm. The press release quoted the FDIC’s Chairman, Sheila Bair, as saying: “The orderly liquidation process established under Title II of the Dodd-Frank Act imposes the losses on shareholders and creditors, while also protecting the economy and taxpayer interests …. Shareholders and unsecured creditors should understand that they, not taxpayers, are at risk.”
The proposed rule also provides that secured creditors will only be protected to the extent of the fair value of their collateral. To the extent that any portion of their claim is unsecured, the secured creditors will absorb losses along with other unsecured creditors. The NPR also addresses discrete issues in the area of the authority to continue operations by paying for services provided by employees and others, the treatment of creditors (by clarifying the measure of damages for contingent claims), and the application of proceeds from the liquidation of subsidiaries.
The proposed regulation will be open for public comment for 30 days after publication in the Federal Register and the broader set of questions for the future rulemaking will be open for public comment for 90 days.