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16324 Federal Register / Vol. 76, No. 56 / Wednesday, March 23, 2011/ Proposed Rules

the referendum herein ordered havebeen submitted to and approved by theOffice of Management and Budget(OMB) and have been assigned OMBNo. 05810178. It has been estimatedthat it will take an average of 20 minutesfor each of the approximately 267Washington potato growers to cast a

ballot. Participation is voluntary. Ballots

postmarked after June 24, 2011, will notbe included in the vote tabulation.

Teresa Hutchinson and Gary D. Olsonof the Northwest Marketing Field Office,Fruit and Vegetable Programs, AMS,USDA, are hereby designated as thereferendum agents of the Secretary ofAgriculture to conduct this referendum.The procedure applicable to thereferendum shall be the Procedure forthe Conduct of Referenda in ConnectionWith Marketing Orders for Fruits,Vegetables, and Nuts Pursuant to theAgricultural Marketing Agreement Actof 1937, as Amended (7 CFR 900.400

900.407).Ballots will be mailed to all growersof record and may also be obtained fromthe referendum agents or from theirappointees.

List of Subjects in 7 CFR Part 946

Marketing agreements, Potatoes,Reporting and recordkeepingrequirements.

Authority: 7 U.S.C. 601674.

Dated: March 16, 2011.

David R. Shipman,

Associate Administrator, AgriculturalMarketing Service.

[FR Doc. 20116829 Filed 32211; 8:45 am]

BILLING CODE 341002P

DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1218

[Doc. No. AMSFV100095]

Blueberry Promotion, Research, andInformation Order; ContinuanceReferendum

AGENCY: Agricultural Marketing Service,USDA.

ACTION: Referendum order.

SUMMARY: This document directs that areferendum be conducted amongeligible producers and importers ofhighbush blueberries to determinewhether they favor continuance of theBlueberry Promotion, Research, andInformation Order (Order).

DATES: This referendum will beconducted by mail ballot from July 5,2011, through July 26, 2011. To be

eligible to vote in this referendum,blueberry producers and importers musthave produced or imported 2,000pounds or more of highbush blueberriesannually during the representativeperiod of January 1, 2010, throughDecember 31, 2010. Ballots must bereceived by the referendum agents nolater than the close of business on July

26, 2011, to be counted.ADDRESSES: Copies of the Order may beobtained from: Referendum Agent,Research and Promotion Branch (RPB),Fruit and Vegetable Programs (FVP),AMS, USDA, Stop 0244, Room 0632S,1400 Independence Avenue, SW.,Washington, DC 202500244, telephone:8887209917 (toll free),fax: 2022052800, e-mail:[email protected];or athttp://www.ams.usda.gov/fvpromotion.

SUPPLEMENTARY INFORMATION: Pursuantto the Commodity Promotion, Research,and Information Act of 1996 (7 U.S.C.

74117425) (Act), it is hereby directedthat a referendum be conducted toascertain whether continuance of theOrder is favored by eligible producersand importers of highbush blueberries.The Order is authorized under the Act.

The representative period forestablishing voter eligibility for thereferendum shall be the period from

January 1, 2010, through December 31,2010. Persons who produced orimported 2,000 pounds or more ofhighbush blueberries during therepresentative period are eligible to votein the referendum. Persons who

received an exemption fromassessments for the entire representativeperiod are ineligible to vote. Thereferendum shall be conducted by mail

ballot from July 5, 2011, through July26, 2011.

Section 518 of the Act authorizescontinuance referenda. Under section1218.71(b) of the Order, the Departmentof Agriculture (Department) shallconduct a referendum every five yearsor when 10 percent or more of theeligible voters petition the Secretary ofAgriculture to hold a referendum todetermine whether persons subject to

assessment favor continuance of theOrder. The Department would continuethe Order if continuance of the Order isapproved by a majority of the producersand importers voting in the referendum,who also represent a majority of thevolume of blueberries produced orimported during the representativeperiod determined by the Secretary.

In accordance with the PaperworkReduction Act of 1995 (44 U.S.C.chapter 35), the referendum ballot has

been approved by the Office ofManagement and Budget (OMB) and

assigned OMB No. 05810093. It hasbeen estimated that there areapproximately 2,000 producers and 50importers who will be eligible to vote inthe referendum. It will take an averageof 15 minutes for each voter to read thevoting instructions and complete thereferendum ballot.

Referendum OrderVeronica Douglass, RPB, FVP, AMS,

USDA, Stop 0244, Room 0632S, 1400Independence Avenue, SW.,Washington, DC 202500244, isdesignated as the referendum agent toconduct this referendum. Thereferendum procedures 7 CFR 1218.100through 1218.107, which were issuedpursuant to the Act, shall be used toconduct the referendum.

The referendum agents will mail theballots to be cast in the referendum andvoting instructions to all knownhighbush blueberry producers andimporters of 2,000 pounds or more priorto the first day of the voting period.Persons who are producers andimporters during the representativeperiod are eligible to vote. Persons whoreceived an exemption fromassessments during the entirerepresentative period are ineligible tovote. Any eligible producer or importerwho does not receive a ballot shouldcontact the referendum agent no laterthan one week before the end of thevoting period. Ballots must be received

by the referendum agent by 5 p.m.Eastern Daylight Savings Time, July 26,2011, in order to be counted.

List of Subjects in 7 CFR Part 1218

Administrative practice andprocedure, Advertising, Consumerinformation, Marketing agreements,Blueberry promotion, Reporting andrecordkeeping requirements.

Authority: 7 U.S.C. 74117425 and 7U.S.C. 7401.

Dated: March 16, 2011.

David R. Shipman,

Associate Administrator, AgriculturalMarketing Service.

[FR Doc. 20116827 Filed 32211; 8:45 am]

BILLING CODE 341002P

FEDERAL DEPOSIT INSURANCECORPORATION

12 CFR Part 380

RIN 3064AD73

Orderly Liquidation Authority

AGENCY: Federal Deposit InsuranceCorporation (FDIC).ACTION: Notice of proposed rulemaking.

VerDate Mar2010 15:59 Mar 22, 2011 Jkt 223001 PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 E:\FR\FM\23MRP1.SGM 23MRP1
mailto:[email protected]://www.ams.usda.gov/fvpromotionmailto:[email protected]://www.ams.usda.gov/fvpromotion


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16325Federal Register / Vol. 76, No. 56 / Wednesday, March 23, 2011/ Proposed Rules

SUMMARY: The FDIC is proposing andrequests comments on a rule that wouldimplement certain provisions of itsauthority to resolve covered financialcompanies under Title II of the Dodd-Frank Wall Street Reform and ConsumerProtection Act (the Dodd-Frank Act orthe Act). This proposed rule(Proposed Rule) builds on the interim

final rule published by the FDIC onJanuary 25, 2011 (Interim Final Rule)to address additional provisions of TitleII. The Proposed Rule addresses thefollowing issues: the definition of afinancial company subject toresolution under Title II by establishingcriteria for determining whether acompany is predominantly engaged inactivities that are financial in nature orincidental thereto; recoupment ofcompensation from senior executivesand directors, in limited circumstances,as provided in section 210(s) of theDodd-Frank Act; application of the

power to avoid fraudulent orpreferential transfers; the priorities ofexpenses and unsecured claims; and theadministrative process for initialdetermination of claims and the processfor judicial determination of claimsdisallowed by the receiver.

DATES: Written comments must bereceived by the FDIC not later than May23, 2011.ADDRESSES: You may submit comments

by any of the following methods: Agency Web Site: http://

www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for

submitting comments on the AgencyWeb Site. E-mail: [email protected].

Include RIN 3064AD73 in the subjectline of the message.

Mail: Robert E. Feldman, ExecutiveSecretary, Attention: Comments, FederalDeposit Insurance Corporation, 550 17thStreet, NW., Washington, DC 20429.

Hand Delivery/Courier: Guardstation at the rear of the 550 17th StreetBuilding (located on F Street) on

business days between 7 a.m. and 5 p.m.(EDT).

Federal eRulemaking Portal: http://www.regulations.gov/.Follow theinstructions for submitting comments.

Public Inspection: All commentsreceived will be posted without changeto http://www.fdic.gov/regulations/laws/

federal/propose.htmlincluding anypersonal information provided. Papercopies of public comments may beordered from the Public InformationCenter by telephone at (703) 5622200or 18772753342.

FOR FURTHER INFORMATION CONTACT:Marc Steckel, Associate Director,Division of Insurance and Research,

2028983618; or R. Penfield Starke,Senior Counsel, Legal Division, (703)5622422. For questions to the LegalDivision concerning the following partsof the Proposed Rule contact:

Definition of predominantly engagedin financial activities: Ryan K.Clougherty, Senior Attorney (202) 8983843.

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

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

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

Subpart BReceivershipAdministrative Claims Procedures:Thomas Bolt, Supervisory Counsel (703)5622046.SUPPLEMENTARY INFORMATION:

I. Background

The Dodd-Frank Act was enacted onJuly 21, 2010. Title II of the Dodd-Frank

Act provides for the appointment of theFDIC as receiver of a covered financialcompany following the prescribedrecommendation, determination andjudicial review process set forth in theAct. Title II outlines the process for theorderly liquidation of such a coveredfinancial company following the FDICsappointment as receiver and providesfor additional implementation of theorderly liquidation authority byrulemaking. The Proposed Rule isintended to provide clarity and certaintywith respect to how key components ofthe orderly liquidation authority will be

implemented and to ensure that theliquidation process under Title IIreflects the Dodd-Frank Acts mandateof transparency in the liquidation ofcovered financial companies. Amongthe significant issues addressed in theProposed Rule are the priority for thepayment of claims and the process forthe determination of claims by thereceiver and for seeking a judicialadjudication of any claims disallowedin whole or in part. While it is notexpected that the FDIC will beappointed as receiver for a coveredfinancial company in the near future, it

is important for the FDIC to have rulesin place in a timely manner in order toallow stakeholders to plan transactionsgoing forward.

The Proposed Rule is promulgatedunder section 209 of the Act whichauthorizes the FDIC, in consultationwith the Financial Stability OversightCouncil, to prescribe such rules andregulations as the FDIC considersnecessary or appropriate to implementTitle II. Section 209 of the Act alsoprovides that, to the extent possible, theFDIC shall seek to harmonize such rules

and regulations with the insolvencylaws that otherwise would apply to acovered financial company.

This is the second rulemaking for theFDIC under section 209. On October 19,2010, the FDIC published in the FederalRegister a notice of proposedrulemaking to implement certainorderly liquidation provisions of Title II.

That rulemaking culminated in theInterim Final Rule published on January25, 2011, to be codified at 12 CFR380.1380.6, that addressed discretetopics that were critical for initialguidance for the financial industry,including the payment of similarlysituated creditors, the honoring ofpersonal services contracts, therecognition of contingent claims, thetreatment of any remaining shareholdervalue in the case of a covered financialcompany that is a subsidiary of aninsurance company, and limitations onliens that the FDIC may take on the

assets of a covered financial companythat is an insurance company or coveredsubsidiary.

The October 19, 2010 notice ofproposed rulemaking solicitedcomments not only on the first proposedrule but also on more general aspects ofthe orderly liquidation authority of TitleII. This comment period ended on

January 18, 2011. These comments havebeen considered with respect to thedetermination of the scope and contentsof the Proposed Rule.

The Proposed Rule continues todevelop the framework begun with theInterim Final Rule. While the Interim

Final Rule addressed only certaindiscrete issues under Title II, theProposed Rule enhances the initialframework by addressing broader issuesthat define the rights of creditors inTitle II receiverships. For example,while the Interim Final Rule specifiedthe treatment ofsimilarly situatedcreditors in 380.2, it did not addressthe treatment of creditors generallywithin the overall structure provided byTitle II for the payment of creditors. TheProposed Rule takes the next step bydefining the priorities of payment forcreditors in a single rule clarifying the

meaning of

administrative expenses

and amounts owed to the UnitedStates, detailing the priority of setoffclaims, specifying how post-insolvencyinterest will be paid, and clarifying thepayment of claims for contracts andagreements expressly assumed by a

bridge financial company. While theProposed Rule does not alter the rulesadopted by the Interim Final Rule,certain subsections of that latter rulelikely will be incorporated into SubpartA on priorities when the Proposed Ruleis finalized in order to provide greater

http://www.fdic.gov/regulations/laws/federal/propose.htmlhttp://www.fdic.gov/regulations/laws/federal/propose.htmlhttp://www.fdic.gov/regulations/laws/federal/propose.htmlhttp://www.fdic.gov/regulations/laws/federal/propose.htmlmailto:[email protected]://www.regulations.gov/http://www.regulations.gov/http://www.fdic.gov/regulations/laws/federal/propose.htmlhttp://www.fdic.gov/regulations/laws/federal/propose.htmlmailto:[email protected]://www.regulations.gov/http://www.regulations.gov/http://www.fdic.gov/regulations/laws/federal/propose.htmlhttp://www.fdic.gov/regulations/laws/federal/propose.htmlhttp://www.fdic.gov/regulations/laws/federal/propose.htmlhttp://www.fdic.gov/regulations/laws/federal/propose.htmlhttp://www.fdic.gov/regulations/laws/federal/propose.html


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112 U.S.C. 1843(k).

2Section 201(a)(11) also provides that financialcompany does not include Farm Credit Systeminstitutions chartered under and subject to theprovisions of the Farm Credit Act of 1971, asamended (12 U.S.C. 2001 et seq.), or governmentalor regulated entities as defined under section1303(20) of the Federal Housing EnterprisesFinancial Safety and Soundness Act of 1992 (12U.S.C. 4502(20)). Consistent with section 201(b) ofthe Dodd-Frank Act, the criteria in the ProposedRule for determining if a company is predominantlyengaged in financial activities would not apply tosuch entities.

376 FR 7731 (February 11, 2011).

thematic coherence. New Subpart Baddresses another key element ofcreditor rights by specifying the processfor initial determination of claims andthe steps necessary to seek a judicialdecision on any disallowed claims. Asa result, the Proposed Rule will providea roadmap for creditors to betterunderstand their substantive and

procedural rights under Title II bydefining key elements determining howtheir claims will be determined and inwhat priority they will be paid. Thediscrete issues addressed in the IFRshould be viewed as components that fitwithin this broader framework.

Other provisions of the Proposed Ruleaddress other foundational elements ofTitle II. Section 380.8 of the ProposedRule helps define which companies may

be subject to resolution under Title II,by clarifying the meaning offinancialcompany in Section 201 of the Dodd-Frank Act. Section 380.7 and the

amendments to section 380.1 helpdefine how compensation may beclawed back from senior executives anddirectors responsible for the failure ofthe covered financial company undersection 210(s) of the Dodd-Frank Act.Section 380.9 of the Proposed Rule willclarify the application of the receiverspowers to avoid fraudulent andpreferential transfers to ensure theyconform to the similar powers under theBankruptcy Code.

Some comments revealedunfamiliarity with the FDICs resolutionprocess by stakeholders outside the

banking industry. By elaborating on the

details of the orderly liquidationprocess, the Proposed Rule seeks toexplain the role of the FDIC as receiverfor a covered financial company. Whilethe orderly liquidation process underthe Dodd-Frank Act resembles theprocess the FDIC undertakes in theresolution of insured depositoryinstitutions in many respects, andreflects the experience developed by theFDIC in resolving those institutions,these regulations implement newlyenacted provisions of the Dodd-FrankAct and do not necessarily inform orinterpret the provisions of the Federal

Deposit Insurance Act, 12 U.S.C. 1811 etseq. (FDI Act), and the law governingthe resolution of failed insureddepository institutions. Thus, someprovisions implementing the Dodd-Frank Act may expand the rights andduties of parties with an interest in theresolution, or otherwise provide rightsand duties that differ from those underthe FDI Act.

A common thread among manycomments was the nature of therelationship between the orderlyliquidation process under the Dodd-

Frank Act and the Bankruptcy Code.Congress mandated that, to the extentpossible, the FDIC will harmonize therules adopted under section 209 of theAct with the Bankruptcy Code orotherwise applicable insolvency laws.While acknowledging certain expressdifferences between the Title II orderlyliquidation process and other

insolvency regimes, this Proposed Rulewas prepared with this statutorymandate in mind.

Finally, many comments emphasizedthe importance of allowing sufficienttime in the rulemaking process to fullyconsider the complex issues raisedunder the Dodd-Frank Act. ThisProposed Rule is a second incrementalstep in the rulemaking process and willinvite input from stakeholders throughadditional questions posed as part of theNotice of Proposed Rulemaking.Additional rulemaking will follow,including certain rules required by the

Act, such as rules governingreceivership termination, receivershippurchaser eligibility requirements,records retention requirements, as wellas the orderly resolution of broker-dealers, including the priority schemeand claims process applicable to broker-dealers.

II. The Proposed Rule

Companies Predominantly Engaged inFinancial Activities

Section 380.8 of the Proposed Ruleestablishes standards for determining ifa company is predominantly engaged in

financial activities. If a company isdetermined to be predominantlyengaged in such activities for purposesof the definition offinancial companyunder Title II of the Act, it may besubject to the orderly liquidationprovisions of Title II.

Section 201(a)(11) of the Dodd-FrankAct defines financial company, forpurposes of Title II of the Act, as anycompany incorporated or organizedunder any provision of Federal law orthe laws of any State that is: (i) A bankholding company, as defined in section2(a) of the Bank Holding Company Act

of 1956 (

BHC Act

); (ii) a nonbankfinancial company supervised by theBoard of Governors of the FederalReserve System (Board of Governors);(iii) any company that is predominantlyengaged in activities that the Board ofGovernors has determined are financialin nature or incidental thereto forpurposes of section 4(k) of the BHCAct,1 or (iv) any subsidiary of suchcompanies that is predominantlyengaged in activities that the Board of

Governors has determined are financialin nature or incidental thereto forpurposes of section 4(k) of the BHC Act,other than a subsidiary that is aninsured depository institution orinsurance company.2

Section 201(b) of the Dodd-Frank Actprovides that, for the purposes ofdefining the term financial company

under section 201(a)(11), [n]o companyshall be deemed to be predominantlyengaged in activities that the Board ofGovernors has determined are financialin nature or incidental thereto forpurposes of section 4(k) of the [BHCAct], if the consolidated revenues ofsuch company from such activitiesconstitute less than 85 percent of thetotal consolidated revenues of suchcompany, as the Corporation, inconsultation with the Secretary [ofTreasury], shall establish by regulation.In determining whether a company is afinancial company under [Title II], the

consolidated revenues derived from theownership or control of a depositoryinstitution shall be included.

Accordingly, the FDIC is issuing aregulation that defines the termpredominantly engaged and creates anew definition offinancial activity toencompass the activities the Dodd-Frank Act includes in the 85 percentcalculation. The FDIC consulted withthe Board of Governors during thedevelopment of this section of theProposed Rule. The Board of Governorshas issued a notice of proposedrulemaking entitled Definitions ofPredominantly Engaged in FinancialActivities and Significant NonbankFinancial Company and Bank HoldingCompany (Board of Governors NPR).3The Board of Governors NPR addressesthe definition ofpredominantlyengaged in financial activities forpurposes of determining if an entity isa nonbank financial company underTitle I of the Dodd-Frank Act.

Definition of Predominantly Engaged

The Proposed Rule defines a companyas being predominantly engaged inactivities that the Board of Governorshas determined are financial in nature

or incidental thereto for purposes of



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4The FDIC also contacted the Board of Governorsand other voting members of the Financial StabilityOversight Council (FSOC) in the development ofthis section. The FDIC notes that Title I includes aseparate definition ofnonbank financial companythat is used for purposes of that Titles provisionsrelated to enhanced supervision by the Board ofGovernors following a systemic determination bythe FSOC. The Board of Governors hasresponsibility for issuing regulations that define theterm predominantly engaged in financialactivities for purposes of Title I. The Title Idefinition of nonbank financial company does nottake into account incidental activities, but doesinclude an asset test in addition to a revenue test.See, 12 U.S.C. 5523 et seq.; and 12 U.S.C. 5531. 5See, 76 FR 7731 (February 11, 2001).

6See, 12 CFR 225.86.7See, 12 U.S.C. 1843(k)(1)(A).812 U.S.C. 1843(k)(1) and (2).9Besides authorizing financial holding

companies to engage in activities that have beendetermined to be financial in nature or incidental

Continued

section 4(k) of the BHC Act if: (1) Atleast 85 percent of the total consolidatedrevenues of the company for eitherof itstwo most recent fiscal years werederived, directly or indirectly, fromfinancial activities or (2) based upon allthe relevant facts and circumstances, theCorporation determines that theconsolidated revenues of the company

from financial activities constitute 85percent or more of the total consolidatedrevenues of the company. As requiredunder section 201(b) of the Act, theFDIC consulted with the Secretary of theTreasury during the development of thisportion of the Proposed Rule.4

The case-by-case determinationprovided for in (2) above is designed toprovide the FDIC the flexibility, inappropriate circumstances, to considerwhether a company meets the 85percent consolidated revenue test basedon the full range of information thatmay be available concerning the

companys activities (includinginformation obtained from other Federalor state financial supervisors oragencies) at any time. For example, acompanys revenues, as well as the risksthe company may pose to the U.S.financial system, may changesignificantly and quickly as a result ofvarious types of transactions or actions,such as a merger, consolidation,acquisition, establishment of a new

business line, or the initiation of a newactivity. Moreover, these transactionsand actions may occur at any timeduring a companys fiscal year and,accordingly, the effects of the

transactions or actions may not bereflected in the year-end consolidatedfinancial statements of the company forseveral months. The Proposed Ruleallows the FDIC to promptly considerthe effect of changes in the nature ormix of a companys activities as a resultof such a transaction or action wheresuch changes may affect whether thecompany should be a financial companyfor purposes of Title II. A determination

based on the facts and circumstanceswould be made by the FDIC Board ofDirectors, unless delegated. The FDICexpects to conduct such a case-by-case

review only when justified by thecircumstances.

While section 201(b) of the Dodd-Frank Act provides that a companysconsolidated revenues are to be used indetermining whether the company ispredominantly engaged in financialactivities, it does not specify the timeperiod over which such consolidated

revenues should be considered inmaking such a determination. The FDICis proposing that either of the last twofiscal years is the appropriate timeperiod for determining whether acompany meets the 85 percent revenuetest (the two-year test). The FDIC

believes that the two-year test providesappropriate flexibility in determiningwhether a company is predominantlyengaged in financial activities. The two-year test would capture, for example, acompany whose revenues havetraditionally met or exceeded the 85percent consolidated revenue test but

that experienced a temporary decline insuch revenues during its last fiscal year.Additionally, the two-year test is similarto a proposal recently promulgated bythe Board of Governors that addresseswhether a company is predominantlyengaged in financial activities for thepurposes of determining if such acompany is a nonbank financialcompany under Title I.5

Under the Proposed Rule, a companywould notbe considered to bepredominantly engaged in financialactivities under the two-year test, andthus would not be a financial company,if the level of such companys financial

revenues were below the 85 percentconsolidated revenue threshold in bothof its two most recent fiscal years. TheProposed Rule defines totalconsolidated revenues as the total grossrevenues of a company and all entitiessubject to consolidation by the companyfor a fiscal year, as determined inaccordance with applicable accountingstandards. Applicable accountingstandards is defined under theProposed Rule as the accountingstandards a company uses in theordinary course of business in preparingits consolidated financial statements,

provided those standards are: (i) U.S.generally accepted accountingprinciples; (ii) International FinancialReporting Standards; or (iii) such otheraccounting standards that the FDICdetermines to be appropriate.

The FDIC believes the ProposedRules approach to calculatingconsolidated revenue is appropriate forseveral reasons. First, the approachreduces the potential for companies toarbitrage the 85% consolidated revenue

test by changing the accountingstandards used for purposes of thisProposed Rule. Specifically, theProposed Rule provides that theaccounting standards used forcalculating total consolidated revenuesmust be the same standards that thecompany uses in the ordinary course ofits business in preparing its

consolidated financial statements.Second, by calculating consolidatedrevenues using the accounting standardsthat a company uses in the ordinarycourse of its business, the ProposedRule also reduces the potentialregulatory burden on companies.Finally, the FDIC believes themethodology for calculatingconsolidated revenues under theProposed Rule is likely to provide anaccurate basis for determining whethercompanies are financial companies forthe purposes of Title II.

Definition of Financial Activity

The Proposed Rule defines financialactivity to include: (i) Any activity,wherever conducted, described insection 225.86 of the Board ofGovernors Regulation Y or anysuccessor regulation; 6 (ii) ownership orcontrol of one or more depositoryinstitution[s]; and (iii) any otheractivity, wherever conducted,determined by the Board of Governorsin consultation with the Secretary of theTreasury, under section 4(k)(1)(A) of theBHC Act,7 to be financial in nature orincidental to a financial activity.

Section 225.86 of the Board of

Governors Regulation Y references theactivities that have been determined to

be financial in nature or incidentalthereto under section 4(k) of the BHCAct. Section 4(k) of the BHC Actauthorizes the Board of Governors, inconsultation with the Secretary of theTreasury, to determine in the future thatadditional activities are financial innature or incidental thereto. 8 TheProposed Rule recognizes that the Boardof Governors may determine thatadditional activities, beyond thosealready identified in 225.86 of theBoard of Governors Regulation Y, are

financial or incidental activities for thepurposes of section 4(k) of the BHC Act.Upon such a determination with respectto an activity, the Proposed Ruleincludes any revenues derived fromsuch activity as revenues derived fromfinancial or incidental activities.9



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thereto section 4(k)(1) of the BHC Act also permitsa financial holding company to engage in activitiesthe Board of Governors has determined to becomplementary to financial activities and do notpose a substantial risk to the safety and soundnessof depository institutions or the financial systemgenerally. See, 12 U.S.C. 1843(k)(1)(B). Becausesection 201(a)(11) refers only to activities that havebeen determined by the Board of Governors to befinancial in nature or incidental thereto undersection 4(k), activities that have been (or are)determined to be complementary to financialactivities under section 4(k) are not consideredfinancial or incidental activities for purposes ofdetermining whether a company is predominantlyengaged in activities that are financial in nature orincidental thereto under section 201(a)(11) of theDodd-Frank Act.

10See, 12 CFR 225.170 et seq.1112 U.S.C. 1843(c)(6).

1212 U.S.C. 1851 et seq.13See, 76 FR 7731 (February 11, 2011). 1476 FR 7731 (February 11, 2011).

Neither section 201(a)(11) nor section201(b) of the Dodd-Frank Act imposeany additional conditions beyond thosethat may apply under section 4(k) of theBHC Act or the Board of GovernorsRegulation Y for an activity to beconsidered a financial or incidentalactivity for purposes of determiningwhether a company is a financial

company under Title II. Accordingly,the Proposed Rule broadly definesfinancial activities to include allfinancial or incidental activities,regardless of: (i) Where the activity isconducted by a company; (ii) whether a

bank holding company or a foreignbanking organization could conduct theactivity under some legal authorityother than section 4(k) of the BHC Act;and (iii) whether any Federal or statelaw other than section 4(k) of the BHCAct may prohibit or restrict the conductof the activity by a bank holdingcompany.

For example, all investment activitiesthat are permissible for a financialholding company under the merchant

banking authority in section 4(k)(4)(H)of the BHC Act and the Board ofGovernors implementing regulations 10are considered financial activities underthe Proposed Rule even if some portionof those activities could be conducted

by a financial holding company underanother or more limited investmentauthority (such as the authority insection 4(c)(6) of the BHC Act,11 whichallows bank holding companies to makepassive, non-controlling investments inany company if the bank holdingcompanys aggregate investmentrepresents less than five percent of anyclass of voting securities and less than25 percent of the total equity of thecompany). Likewise, all securitiesunderwriting and dealing activities areconsidered financial activities forpurposes of the Proposed Rule even ifa bank holding company or othercompany affiliated with a depositoryinstitution may be limited in the

amount of such activity it may conductor may be prohibited from broadlyengaging in the activity under theVolcker Rule. 12

Rules of Construction

To further facilitate determinationsunder the Proposed Rule and to reduce

burden, the Proposed Rule includes two

rules of construction governing theapplication of the two-year test torevenues derived from a companysminority, non-controlling equityinvestments in unconsolidatedentities.

Under the first rule of construction,the revenues derived from a companysequity investment in another company(investee company), the financialstatements of which are notconsolidated with those of the companyunder applicable accounting standards,would be considered as revenuesderived from a financial activity if theinvestee company itself ispredominantly engaged in financialactivities under the revenue test setforth in the Proposed Rule (non-consolidated investment rule). Treatingall of the revenues derived from such aninvestment as derived from a financialactivity based on the aggregate mix ofthe investee companys revenues isconsistent with the statutory definitionof financial company generally, whichtreats an entire company as a financialcompany if 85 percent of itsconsolidated revenues are derived fromfinancial activities. This approach alsoavoids requiring a company todetermine the precise percentage of an

investee companys activities that arefinancial in order to determine theportion of the companys revenuesderived from the investment that should

be treated as derived from suchactivities. Lastly, the non-consolidatedinvestment rule is similar to theapproach proposed by the Board ofGovernors for determining whether anonbank company is predominantlyengaged in financial activities underTitle I.13

The second rule of constructionwould permit (but not require) acompany to treat revenues it derives

from certain de minimis equityinvestments in investee companies asnotderived from financial activitieswithout having to separately determinewhether the investee company is itselfpredominantly engaged in financialactivities (de minimis rule). The deminimis rule would be subject to severalconditions designed to limit thepotential for these de minimisinvestments to substantially alter the

character of the activities of thecompany.

Specifically, the de minimis ruleprovides that a company may treatrevenues derived from an equityinvestment in an investee company asrevenues notderived from financialactivities (regardless of the type ofactivities conducted by the investee

company), if: (i) The company owns lessthan five percent of any class ofoutstanding voting shares, and less than25 percent of the total equity, of theinvestee company; (ii) the financialstatements of the investee company arenot consolidated with those of thecompany under applicable accountingstandards; (iii) the companysinvestment in the investee company isnotheld in connection with the conductof any financial activity (such as, forexample, investment advisory activitiesor merchant banking investmentactivities) by the company or any of its

subsidiaries; (iv) the investee companyis not a bank, bank holding company,broker-dealer, insurance company, orother regulated financial institution; and(v) the aggregate amount of revenuestreated as nonfinancial under the rule ofconstruction in any year does notexceed five percent of the companystotal consolidated financial revenues.

The FDIC consulted with the Board ofGovernors during the development ofthis section of the Proposed Rule. TheBoard of Governors has issued a noticeof proposed rulemaking entitledDefinitions of Predominantly Engagedin Financial Activities and Significant

Nonbank Financial Company and BankHolding Company (Board ofGovernors NPR).14 The Board ofGovernors NPR addresses the definitionofpredominantly engaged in financialactivities for purposes of determining ifan entity is a nonbank financialcompany under Title I of the Dodd-Frank Act.

Recoupment of Compensation

Section 380.7 of the Proposed Ruleestablishes criteria for the circumstancesunder which the FDIC as receiver willseek to recoup compensation from

persons who are substantiallyresponsible for the failed condition of acovered financial company.

Background

When appointed receiver for a failedcovered financial company, the FDIC isrequired to exercise its Title II authorityto liquidate failing financial companiesin a manner that furthers the statutorypurposes of Title II as set forth insection 204(a) of the Act: mitigation of



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15Section 204(a)(3) of the Act.

significant risk to the financial stabilityof the United States and minimizationof moral hazard. In fulfilling these goals,the FDIC must * * * take all stepsnecessary and appropriate to assure thatall parties, including management,directors, and third parties, havingresponsibility for the condition of thefinancial company bear losses

consistent with their responsibility,including actions for damages,restitution, and recoupment ofcompensation and other gains notcompatible with such responsibility. 15In order to carry out this mandate, theFDIC as receiver may recover fromsenior executives and directors whowere substantially responsible for thefailed condition of a covered financialcompany any compensation that theyreceived during the two-year periodpreceding the date on which the FDICwas appointed as receiver of the coveredfinancial company, or during an

unlimited time period in the case offraud. Section 210(s)(3) of the Actdirects the FDIC to promulgateregulations to implement thecompensation recoupment requirementsof section 210(s) of the Act. The purposeof this section is to provide guidance onhow the FDIC will implement itsauthority by identifying thecircumstances in which the FDIC asreceiver will seek to recoupcompensation from persons who aresubstantially responsible for the failedcondition of a covered financialcompany.

Substantially ResponsibleIn assessing whether a senior

executive or director is substantiallyresponsible for the failed condition ofthe covered financial company, theFDIC as receiver will investigate: (1)How the senior executive or directorperformed his or her duties andresponsibilities, and (2) the results ofthat performance. Senior executives anddirectors who perform theirresponsibilities with the requisitedegree of skill and care will not berequired to forfeit their compensation.The health of the financial industry

depends on these persons remainingcommitted to the industry. If a seniorexecutive or director fails to meet therequisite degree of skill and care,however, the FDIC as receiver willdetermine what results that failure hadon the covered financial company, byconsidering any loss to the coveredfinancial company caused individuallyor collectively by the senior executive ordirector. Furthermore, to be heldresponsible, the loss to the financial

condition must have materiallycontributed to the failure of the coveredfinancial company. The FDIC isconsidering the use of additionalqualitative and quantitative benchmarksto establish that the loss materiallycontributed to the failure of the coveredfinancial company. Financial indicatorsunder consideration as possible

benchmarks are assets, net worth andcapital, and the percentage ormagnitude of loss associated with these

benchmarks that would establish amaterial loss and trigger substantialresponsibility. The FDIC solicitscomments on these and other potential

benchmarks that may be used toeffectively evaluate loss.

Presumptions

In the event that the FDIC isappointed as receiver for a coveredfinancial company, certain persons will

be presumed substantially responsiblefor the financial condition of thecompany. Substantial responsibilityshall be presumed when the seniorexecutive or director is the chairman ofthe board of directors, chief executiveofficer, president, chief financial officer,or acts in any other similar roleregardless of his or her title if in thisrole he or she had responsibility for thestrategic, policymaking, or company-wide operational decisions of thecovered financial company. The FDIC asreceiver also will presume thesubstantial responsibility of a seniorexecutive or director who has beenadjudged by a court or tribunal to have

breached his or her duty of loyalty tothe covered financial company. Finally,in order to ensure consistency thispresumption also extends to a seniorexecutive or director who has beenremoved from his or her position witha covered financial company undersection 206(4) or section 206(5) of theAct.

An individual presumed to besubstantially responsible for the failedcondition of a covered financialcompany based on his or her position orrole in the covered financial companymay rebut the presumption of

substantial responsibility for thecondition of the covered financialcompany by proving that he or sheperformed his or her duties with therequisite degree of skill and carerequired by the position. Thisdetermination will be made on a case-

by-case basis. A senior executive ordirector presumed to be substantiallyresponsible for the failed condition of acovered financial company based on hisor her removal from his or her positionunder sections 206(4) or 206(5) of theAct, or based on an adjudication that he

or she breached his or her duty ofloyalty to the covered financialcompany may rebut the presumption byproving that he or she did not did notcause, either individually or inconjunction with others, a loss to thecovered financial company thatmaterially contributed to the failure ofthe covered financial company.

Exceptions to Presumptions

Senior executives or directors whojoin a covered financial companyspecifically for the purpose ofimproving its financial condition areexempted from this presumption if theywere employed by the covered financialcompany for this purpose within thetwo years preceding the appointment ofthe FDIC as receiver. However, althoughthey are not subject to the presumption,the FDIC as receiver may still seekrecoupment of their compensation iftheir actions nevertheless establish thatthey are substantially responsible for thefailed condition of the covered financialcompany.

The use of a rebuttable presumptionof substantial responsibility undercertain circumstances is consistent withits use in other regulatory and commonlaw areas. The Office of the Comptrollerof the Currency uses rebuttablepresumptions to determine when anindividuals acquisition of bank stockwill result in the acquisition by thatindividual of the power to direct the

banks management or policies. 12 CFR5.50. The Social SecurityAdministration uses presumptions to

establish total disability. 20 CFR part410. At common law, the existence ofcertain facts, such as exclusive controlin negligence cases or disparate impactin discrimination cases, is viewed assufficient to require some form ofrebuttal evidence.

The authority of the FDIC as receiverto recoup compensation from seniorexecutives and directors is separatefrom the authority granted to the FDICas receiver in other sections of Title IIto pursue recovery from seniorexecutives and directors for lossessuffered by a failed covered financial

company. The FDIC as receiver is notprecluded from pursuing recovery basedon other grants of authority in Title II ofthe Act because it recoupscompensation from senior executivesand directors under Section 210(s).

Section 380.1 of the Proposed Ruleamends the existing 380.1promulgated pursuant to the January 25,2011 Interim Final Rule to adddefinitions of the terms compensationand director, and to apply thedefinition ofsenior executiveincluded in 380.3 of the Interim Final



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16The term judicial lien is defined in section101(36) of the Bankruptcy Code as a lien obtainedby judgment, levy, sequestration or other legal orequitable process or proceeding. A similar, butabbreviated, formulation is found in section547(e)(1)(B) of the Bankruptcy Code.

17These provisions conform with the letter datedDecember 29, 2010 from the FDICs Acting GeneralCounsel to the Securities Industry and FinancialMarkets Association (SIFMA) and the AmericanSecuritization Forum available on SIFMAs Website at http://www.sifma.org/issues/item.aspx?id=22820.

Rule wherever the phrase seniorexecutive is used in the Proposed Ruleand throughout part 380. The definitionof the term compensation incorporatesthe definition mandated in section210(s)(3) of the Act. The ProposedRules definition for the term directorincludes those persons who are in aposition to affect the activities of the

covered financial company and whohave a material effect on the financialcondition of the covered financialcompany.

Treatment of Fraudulent andPreferential Transfers

Section 380.9 of the Proposed Ruleaddresses the powers granted to theFDIC as receiver in section 210(a)(11) ofthe Act to avoid certain fraudulent andpreferential transfers and seeks toharmonize the application of thesepowers with the analogous provisions ofthe Bankruptcy Code so that thetransferees of assets will have the sametreatment in a liquidation under theDodd-Frank Act as they would in a

bankruptcy proceeding.There are two areas in which there is

a potential for inconsistent treatment oftransferees under a Title II orderlyliquidation as compared to a Chapter 7

bankruptcy liquidation. The first issuerelates to the standard used indetermining whether the FDIC asreceiver can avoid a transfer asfraudulent or preferential under Title II.For purposes of this determination,section 210(a)(11)(H)(i)(II) of the Actprovides that a transfer is made when

the transfer is so perfected that a bonafide purchaser cannot acquire a superiorinterest, or if the transfer has not beenso perfected before the FDIC isappointed as receiver, immediately

before the date of appointment. Thissection could be read to apply the bona

fide purchaser construct to allfraudulent transfers and to allpreferential transfers pursuant to section210(a)(11)(B) of the Dodd-Frank Act. Bycontrast, the Bankruptcy Code uses thebona fide purchaser construct only forfraudulent transfers and for preferentialtransfers of real property other than

fixtures. Section 547(e)(1)(B) of theBankruptcy Code provides that in thecase of preferential transfers of personalproperty and fixtures, a transfer occursat the time the transferees interest inthe transferred property is so perfectedthat a creditor on a simple contractcannot acquire a judicial lien 16 that is

superior to the interest of the transferee.This section of the Proposed Rule makesclear that under section 210(a)(11)(H) ofthe Dodd-Frank Act, the FDIC could not,in a proceeding under Title II, avoid aspreferential the grant of a securityinterest perfected by the filing of afinancing statement in accordance withthe provisions of the Uniform

Commercial Code or other non-bankruptcy law where a securityinterest so perfected could not beavoided in a case under the BankruptcyCode.

The second issue relates to the 30-daygrace period, provided in section547(e)(2) of the Bankruptcy Code, inwhich a security interest in transferredproperty may be perfected after suchtransfer has taken effect between theparties. Section 547(e)(2) of theBankruptcy Code generally states that atransfer of property is made (i) when thetransfer takes effect between the

transferor and the transferee, if thetransfer is perfected at or within 30 daysafter that time (or within 30 days of thetransferor receiving possession of theproperty, in the case of certain purchasemoney security interests), (ii) when thetransfer is perfected, if the transfer isperfected after the 30-day period, or (iii)if such transfer is not perfected beforethe later of the commencement of the

bankruptcy case or 30 days after thetransfer takes effect, immediately beforethe date when the bankruptcy petitionis filed. Section 210(a)(11)(H) of theDodd-Frank Act does not contain anyexpress grace period. Consistent with

the direction provided in section 209 ofthe Dodd-Frank Act to harmonize theregulations with otherwise applicableinsolvency law to the extent possible,and to facilitate implementation of theavoidable transfer provisions of sections210(a)(11)(A) and (B) of the Dodd-FrankAct, 380.9 of the Proposed Ruleincludes provisions that would result inthe following:17

The avoidance provisions in section210(a)(11) would apply the bona fidepurchaser construct only in the case offraudulent transfers under subparagraph(A) thereof and preferential transfers of

real property (other than fixtures) undersubparagraph (B) thereof; The avoidance provisions in section

210(a)(11)(B) would apply thehypothetical lien creditor construct asapplied under section 547(e)(1)(B) of theBankruptcy Code to any preferential

transfers of personal property andfixtures; and

the avoidance provisions in section210(a)(11)(B) would apply the 30-daygrace period as provided in section547(e)(2) of the Bankruptcy Code,including any exceptions orqualifications contained therein.

Subpart APriorities

The Proposed Rule adds a Subpart Aconsisting of 380.2026 relating tothe priorities of expenses and unsecuredclaims in the receivership of a coveredfinancial company. Subpart A integratesall of the various provisions of theDodd-Frank Act that determine thenature and priority of payments. First,the Subpart integrates the variousstatutory references to administrativeexpenses throughout the Act includingidentification of claims for amounts dueto the United States, to ensureconsistent application of thoseprovisions. Second, the Subpartconfirms the statutory preference forclaims arising out of the loss of setoffrights over other general unsecuredcreditors if the loss of the setoff is dueto the receivers sale or transfer of anasset. Third, the Proposed Rule clarifiesthe payment of obligations of bridgefinancial companies and the rights ofreceivership creditors to remainingvalue. Finally, the Proposed Ruleprovides for the payment of post-insolvency interest on claims and forthe determination of the index by whichthe limit applicable to certain claims forwages and benefits will be increased.

Subpart A of the Proposed Ruleorganizes and clarifies provisionsthroughout Title II of the Dodd-FrankAct dealing with the relative prioritiesof various creditors with claims againsta failed financial company. Thesevarious provisions are based on thefundamental principle that any orderlyliquidation should fairly treat similarlysituated creditors and should ensurethat the ultimate risk of loss for a failureof a systemically important financialcompany rests with the stockholders ofthe failed company. Although toolswere put into place to ensure that

temporary financing would be availableto facilitate an orderlyliquidation of thecompany to preserve its going concernvalue and to avoid cost-increasingdisruptions of operations, the Dodd-Frank Acts resolution regime makesclear that there will be no more bailouts.

The responses to the request for broadcomments in the October 19, 2010Notice of Proposed Rulemaking raised anumber of issues regarding the prioritiesof expenses and unsecured claims in acovered financial company receivership.Among the suggestions for future

http://www.sifma.org/issues/item.aspx?id=22820http://www.sifma.org/issues/item.aspx?id=22820http://www.sifma.org/issues/item.aspx?id=22820http://www.sifma.org/issues/item.aspx?id=22820


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rulemakings, the topic of priorities ofclaims appeared often. One specifictopic raised by several commentersincluded section 210(a)(12)(F) of theDodd-Frank Act regarding the priorityfor creditors who are deprived of setoffrights. Another was the treatment ofpost-solvency interest, particularly withrespect to oversecured creditors. Other

comments requested that the FDICclarify the relationship between a bridgefinancial company and creditors of thecovered financial company. Subpart Aof the Proposed Rule addresses theseand other issues with respect topriorities. Other suggestions will betaken up in future rulemakings, andfurther comments are solicited inresponse to this Notice of ProposedRulemaking.

Definitions

Section 380.20 of the Proposed Rulecontains a definition of the termallowed claim

which is usedthroughout Subpart A to mean a claim

in the amount allowed by the FDIC asreceiver in accordance with theprocedures established in Subpart B ofthe Proposed Rule, or as determined bythe final order of a court of competentjurisdiction. Definitions that applythroughout part 380 are found in 380.1, including the definitions ofsenior executive (previously includedin 380.3), compensation, anddirector.

Priority of Unsecured Claims

Section 380.21 lists each of the eleven

priority classes of claims establishedunder the Dodd-Frank Act in the orderof its relative priority. In addition to thespecified priorities listed in section210(b), the Proposed Rule integratesadditional levels of priority establishedunder section 210(c)(13)(d) (certainpost-receivership debt); section210(a)(13) (claims for loss of setoffrights); and section 210(a)(7)(D) (postinsolvency interest). In order, the elevenclasses of priority of claims are asfollows:

(1) Claims with respect to post-receivership debt extended to the

covered financial company where suchcredit is not otherwise available,(2) Other administrative costs and

expenses,(3) Amounts owed to the United

States,(4) Wages, salaries and commissions

earned by an individual within 6months prior to the appointment of thereceiver up to the amount of $11,725 (asadjusted for inflation),

(5) Contributions to employee benefitplans due with respect to suchemployees up to the amount of $11,725

(as adjusted for inflation) times thenumber of employees,

(6) Claims by creditors who have lostsetoff rights by action of the receiver,

(7) Other general unsecured creditorclaims,

(8) Subordinated debt obligations,(9) Wages, salaries and commissions

owed to senior executives and directors,

(10) Post-insolvency interest, whichshall be distributed in accordance withthe priority of the underlying claims,and (1) Distributions on account ofequity to shareholders and other equityparticipants in the covered financialcompany.

Paragraph (b) of 380.21 conforms themethod of adjusting certain paymentsfor inflation to the similar provisions ofthe Bankruptcy Code. Paragraph (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.This Proposed Rule establishes the

general rule for the priority of claims ofdifferent classes of creditors. The Dodd-Frank Act provides for limitedexceptions to this general rule of similartreatment for similarly-situatedcreditors, and any exception to thepriorities established by this sectionmust meet the statutory grounds forsuch an exception and the relatedregulations, including 380.2 of thispart.

Administrative Expenses

There are several referencesthroughout the Act to the administrativeexpenses of the receiver. In section201(a)(1) of the Dodd-Frank Act, theterm is defined as including both theactual, necessary costs and expensesincurred by the receiver in liquidating acovered financial company, as well asany obligations that the FDIC asreceiver determines are necessary andappropriate to facilitate the smooth andorderly liquidation of the coveredfinancial company. Section 210(b)(2) ofthe Dodd-Frank Act provides that thereceiver may grant first priorityadministrative expense status tounsecured debt obtained by the receiverin the event that credit is not otherwiseavailable from commercial sources.Administrative expense priority is givento debt incurred by the FDIC as receiverin enforcing an existing contract toextend credit to the covered financialcompany under section 210(c)(13)(D).The Act also expressly confersadministrative expense status on claimsfor payment for services performedunder a service contract of the coveredfinancial company after appointment of

the receiver (210(c)(7)(B)(ii)) and forpayment of ongoing contractual rent forleases under which the coveredfinancial company is lessee (210(c)(4))in harmony with bankruptcy practice aswell as current practice under the FDIAct. In addition, pursuant to section211(d)(4) of the Dodd-Frank Act, theexpenses of the Inspector General of the

FDIC incurred in connection with theconduct of an investigation of theliquidation of any covered financialcompany shall be funded as anadministrative expense of the receiver ofthat covered financial company. Section210(a)(15) of the Dodd-Frank Actexpressly provides that damages for

breach of a contract executed orapprovedby the FDIC as receiver for acovered financial company shall be paidas an administrative expense.Subparagraph 380.22(a)(3) clarifies thatthe phrase executed or approvedincludes only (i) contracts that are

affirmatively entered into by the FDIC asreceiver in writing after the date of itsappointment, or (ii) contracts that pre-date the appointment of the FDIC asreceiver that have been expresslyapproved in writing by the receiver.Damages for breach of a pre-receivershipcontract cannot attain administrativeexpense priority merely by the inactionof the receiver, such as the absence ofa formal repudiation. Similarly, acontract inherited by the FDIC asreceiver will not be deemed to have

been approved based upon an allegedcourse of conduct by the receiver.

Affirmative action by the receiver byformally approving the contract inwriting is the prerequisite foradministrative expenses treatment ofdamages for breach of a contract enteredinto by the covered financial companyprior to appointment of the receiver.

In addition to consolidating all ofthese statutory references to theadministrative expenses of the receiverinto a single rule, proposed 380.22(a)makes clear that expenses of thereceiver that are necessary andappropriate to facilitate a smooth andorderly liquidation may be incurred bythe FDIC pre-failure as well as after theappointment of the FDIC as receiver,and that all such expenses areadministrative expenses of the receiver.The inclusion of both pre-failure andpost-failure administrative expensesunder the same standard is consistentwith the treatment of administrativeexpenses under the FDI Act. See 12 CFR360.4. In a bankruptcy case, the pre-petition expenses of preparing a petitionmust be paid prior to filing or awaitconfirmation. All fees, compensationand expenses of liquidation and



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administration shall be fixed by theFDIC. Such fees, compensation andexpenses include amounts that theCorporation charges the receivership forservices rendered by the FDIC.

Amounts Owed to the United States

Section 210(b)(1)(B) of the Dodd-Frank Act establishes a priority class foramounts owed to the United States

immediately following the priority classfor administrative expenses of thereceiver. Section 380.23 of theProposed Rule establishes a definitionfor the phrase amounts owed to theUnited States and makes clear that itincludes amounts advanced by theDepartment of Treasury or by any otherdepartment, agency or instrumentalityof the United States, whether suchamounts are advanced before or after theappointment of the receiver. For thesake of clarity, in addition to expresslylisting advances by the FDIC for fundingthe orderly liquidation of the coveredfinancial company pursuant to section204(d)(4) as amounts owed to theUnited States, the Proposed Rule alsoexpressly includes other sums advanced

by departments, agencies andinstrumentalities of the United Statessuch as amounts owed to the FDIC forpayments made pursuant to guaranteesincluding payments to satisfy anyguarantee of debt under the FDICsTemporary Liquidity GuaranteeProgram, 12 CFR part 370, as well asunsecured accrued and unpaid taxesowed to the United States. Unsecuredclaims for net realized losses by a

Federal reserve bank also are included,consistent with the mandate undersection 1101 of the Act that requiressuch advances to have the same priorityas amounts due to the United StatesDepartment of Treasury. The Dodd-Frank Act does not similarly specificallyinclude government-sponsored entitiessuch as FNMA, FHMLC or FederalHome Loan Banks, and the regulationtherefore does not provide thatobligations to those entities would beamong the class of claims includedamong amounts owed to the UnitedStates under subsection 380.21(a)(3).

Although section 204(d)(4) of theDodd-Frank Act provides that the FDIChas the power to take liens upon assetsof the covered financial company tosecure advances and guarantees madeunder that section, and provides thatsuch advances will be repaid asadministrative expenses asappropriate, the Proposed Rule makesclear that the FDIC will treat all suchamounts as amounts owed to the UnitedStates payable at the level of priorityimmediately following administrativeexpenses. This priority will apply

regardless of whether or not suchadvance is treated as debt or equity onthe books of the covered financialcompany. It will also apply whether ornot such advance is secured by a lienunder section 204(d)(4) in recognition ofthe FDICs authority to imposeassessments under section 210(o),which effectively guarantees repayment

of such advances whether or not theyare secured. Similarly, although thestatute permits a distinction betweenadvances for the purpose of fundingadministrative expenses (which arerepayable at the administrative expensepriority level) and other advances thatare repaid as amounts owed to theUnited States, there will be littlepractical difference in the treatment ofobligations for amounts advanced undersection 204(d) of the Act because thepower to impose additional assessmentsunder section 210(o) assures that theseamounts always will be repaid, thereby

rendering unnecessary the need to trackthe actual use of such advances. As apractical matter, the only potentialdifference in the payment of a claim atthe administrative expense priorityunder 380.21(a)(2) and a claim at thepriority class level for amounts owed tothe United States under 380.21(a)(3)would be the timing of the payment,and that potential differential would beaddressed by the payment of interest atthe post-insolvency rate as described in 380.25.

Section 380.23(b) acknowledges thatthe United States may consent tosubordination of its right to repayment

of any specified debt or obligationprovided that allunsecured claims ofthe United States shall, at a minimum,have a higher priority than equity orother liabilities of the covered financialcompany that count as regulatorycapital. This is consistent with themandatory requirement of section 206 ofthe Dodd-Frank Act that theshareholders of a covered financialcompany shall not receive paymentuntil after all other claims are fully met.

Setoff

Section 210(a)(12) of the Dodd-Frank

Act permits a creditor to offset certainqualified mutual debts between thecovered financial company and thecreditor. To allow the FDIC as receiverthe flexibility to maximize the returnfrom the disposition of assets of thecovered financial company and totransfer assets to a bridge financialcompany so as to preserve the goingconcern value of the company, theDodd-Frank Act specifically empowersthe receiver to transfer assets of acovered financial company free andclear of the setoff rights of any third

party. Section 380.24 of the ProposedRule addresses the claims of creditorswho have lost a right of setoff due to theexercise of the receivers right to sell ortransfer assets of the covered financialcompany free and clear. Normally, atransfer of the assets without the claimwill prevent setoff because the transferdestroys the mutuality of obligations

that is the prerequisite of any ability tooffset a claim directly against anobligation. The Dodd-Frank Actincludes section 210(a)(12)(F) to providea claimant with a preferred recovery asa general creditor and, thereby, achievecomparable protection. In the ProposedRule, 380.24 ensures that the claim ofa creditor based upon the loss of anotherwise valid right of setoff due to atransfer of assets of the receiver will bepaid at the level of priority immediatelyprior to all other general unsecuredcreditors.

Under the Dodd-Frank Act, the

receiver is expressly authorized to sellassets free and clear of setoff claims, andthe resulting claim for loss of thoserights is expressly given a priority aboveother general unsecured creditorsbut

below administrative claims, amountsowed to the United States and certainemployee-related claims. Thispreferential treatment should normallyprovide value to setoff claimantsequivalent to the value of setoff underthe Bankruptcy Code. While in

bankruptcy setoff claims arefunctionally treated similarly to asecurity interest, the Bankruptcy Codetreatment would severely impair the

FDICs ability to transfer assets of thecovered financial company for value.The provisions of the Dodd-Frank Actand the implementing provisions in theProposed Rule do provide adequateprotection for the claimant in thecontext of the necessity for prompttransfer of the underlying asset. TheProposed Rule establishes that the FDICas receiver will pay claimants for theirloss of setoff rights in accordance withthe express provisions of the Dodd-Frank Act.

Post-Insolvency Interest

Section 380.25 of the Proposed Ruleestablishes a post-insolvency interestrate, as required by section 210(a)(7)(D)of the Dodd-Frank Act. That rate is

based on the coupon equivalent yield ofthe average discount rate set on thethree-month U.S. Treasury Bill. Post-insolvency interest is computedquarterly and is not compounded. Thisis the rate that has been used by theFDIC in connection with claims underthe FDI Act, and the same rate waschosen for the Dodd-Frank Act for easeof administration. In contrast, the



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Bankruptcy Code provides in section726(a)(5) for post-petition interest at thelegal rate; however, in interpretingthis provision, bankruptcy courts havenot established a uniform post-petitioninterest rate. For the purpose of uniformtreatment, the Proposed Rule computespost-insolvency interest in the samemanner as provided for under the FDI

Act pursuant to 12 CFR 360.7.The Proposed Rule makes it clear that

the post-insolvency interest is appliedto the entire claim amount, which mayinclude pre-receivership interest. Inaddition, if the claim is for damagesarising out of repudiation of anobligation, the claim amount mayinclude interest through the date ofrepudiation as required under section210(c)(3)(D) of the Act. The Dodd-FrankAct does not contain a provision similarto section 506(b) of the BankruptcyCode allowing interest at the contractrate and certain fees and expenses to be

paid to oversecured creditors to theextent of the value of their collateral.Comment is sought on whether this isan area in which the FDIC should seekto harmonize orderly resolution practicewith the Bankruptcy Code.

Transfers to Bridge FinancialCompanies

Section 380.26 of the Proposed Ruleaddresses and clarifies the treatment ofassets and liabilities that are transferredto a bridge financial company by theFDIC as receiver by providing that anyobligation that is expressly purchased orassumed by the bridge financial

company will be paid by the bridgefinancial company in accordance withthe terms of such obligation. TheProposed Rule similarly addresses thetreatment of contracts or agreementsexpressly entered into by the bridgefinancial company. As an operatingcompany, a bridge financial companywill make payments on valid andenforceable obligations as they becomedue and not pursuant to a claimsprocess. In short, valid and enforceableobligations purchased or assumed bythe express agreement of the bridgefinancial company, as well as valid and

enforceable obligations under contractsor agreements expressly agreed to by thebridge financial company will be paidin full as part of the normal operationsof the bridge financial company.

Certain rights and obligations of thecovered financial company will betransferred and assumed by the expressagreement of the bridge financialcompany in the purchase andassumption agreement with the receiverfor that covered financial company. Theterms and conditions under which thoserights and obligations are transferred

and assumed will, of course, begoverned by the terms of the purchaseand assumption agreement. Thus, if anobligation is conditionally transferred toa bridge financial company subject todue diligence, put-back rights or othercontingencies, the assumption of theobligation would be subject to thesecontingencies. Section 380.26 should

not be read to eliminate expresscontingencies to the assumption ofobligations nor any right to terminate anobligation or to put it back to thereceiver of the covered financialcompany.

Several comments requested that arule be promulgated to clarify therelationship between the bridgefinancial company and the creditors ofthe covered financial company. A bridgefinancial company will be a solventcompany when it is formed inaccordance with the expressrequirements of section 210(h)(5)(F) of

the Act. The Dodd-Frank Act provides,however, that a bridge financialcompany has a finite existence pursuantto section 210(h)(12), and section 210(n)contemplates several means ofdisposing of the assets and liabilities ofa bridge financial company andterminating its existence. A bridgefinancial company can be sold viamerger, consolidation or a sale of stock,whereupon the bridge financialcompanys federal charter is terminatedand any remaining assets liquidated. A

bridge financial company also can beliquidated by a sale of its assets andassumption of its liabilities. If a bridge

financial company is not liquidated,dissolved and terminated within twoyears of the date it is chartered (subjectto not more than three one-yearextensions), the FDIC shall act asreceiver for the bridge financialcompany and shall wind up the affairsof the bridge financial company inconformity with the liquidation ofcovered financial companies under TitleII of the Act, including the priorities andclaims provisions. The Proposed Rulemakes clear that the proceeds thatremain following sale, liquidation anddissolution of the bridge financial

company will be distributed to the FDICas receiver for the covered financialcompany and will be made available tothe creditors of the covered financialcompany after all administrativeexpenses and other creditor claims ofthe receiver for the bridge financialcompany have been satisfied.

Subpart BReceivership AdministrativeClaims Process

The Proposed Rule also includesSubpart B, consisting of 380.3039and 380.5055, to clarify how

creditors can file claims against thereceivership estate, how the FDIC asreceiver will determine those claims,and how creditors can pursue theirclaims in Federal court.

Section 210(a)(2)(5) of the Dodd-Frank Act provides for the resolution ofclaims against a covered financialcompany through an administrative

process conducted by the FDIC asreceiver. Generally, this process calls forcreditors to file their claims with thereceiver by a claims bar date. Thereceiver will determine whether toallow or disallow a claim no later than180 days after the claim is filed (subjectto any extension agreed to by theclaimant). If the claim is disallowed, theclaimant may seek de novo judicialreview of the claim by filing a lawsuit(or continuing a pending lawsuit)within a prescribed 60-day time period.No court has jurisdiction to hear anyclaim against either the covered

financial company or the receiver unlessthe claimant has first obtained adetermination of the claim from thereceiver.

Congress has established an exclusive,separate set of procedures for thepresentation and determination ofclaims against a covered financialcompany or the FDIC as receiver. Thestatute is clear that the claimant mustexhaust the administrative claimsprocess as a jurisdictional prerequisite

before any court can adjudicate theclaim. While harmonization with otherinsolvency laws may be worthwhile andachievable in many other aspects of the

orderly liquidation of a coveredfinancial company, the FDIC cannotpromulgate rules that materially divergefrom or are inconsistent with the claimsprocedures set forth in the Dodd-FrankAct. Nevertheless, the FDIC believesthat it is appropriate to look to theBankruptcy Code to fill gaps in the Act,for example, where the Title II claimsprocedures lack specific directivesregarding how the receiver shouldhandle property that serves as collateralfor a secured claim.

The administrative claims process ofTitle II is closely modeled after the

claims process set forth in the FDI Actfor receiverships of insured depositoryinstitutions. Like the FDI Act claimsprocess, the Title II administrativeprocess for claims against a coveredfinancial company is designed tomaximize efficiency while reducing thedelay and additional costs that could beincurred in a different insolvencyregime. Creditors rights are protected

by the availability of judicial review ifthe claim is disallowed, in whole or inpart, by the receiver. This is a de novodetermination of the claim by the court



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on its merits and not a review ofwhether the receiver abused itsdiscretion in disallowing the claim.

Because many parties may beunfamiliar with the resolution processfor a failed insured depositoryinstitution generally and theadministrative claims process inparticular, the FDIC has undertaken in

the Proposed Rule to explain certainimportant aspects of the claims processfor a covered financial companyreceivership. While the Proposed Rulereflects all the statutory procedures, italso organizes those procedures in astep-by-step manner in order to promotegreater understanding and clarity. Insome instances, the Proposed Ruleinterprets the statutory procedures toaddress issues that are not addressed inthe statute. For example, the statutedoes not provide notice procedures forclaimants who are discovered after theclaims bar date; the Proposed Rule fills

this gap by providing for a 90-dayclaims filing period for such claimants.In other instances, the Proposed Rulesupplements the statutory procedures inorder to facilitate programs that have

been instituted by the FDIC for greaterefficiency, such as the electronic filingof claims.

The following sections appear underSubpart B of the Proposed Rule:

Receivership Administrative ClaimsProcess

Section 380.30 of the Proposed Rulereflects the express authorization underthe Dodd-Frank Act that the FDIC as

receiver shall determine all claims inaccordance with the statutoryprocedures and with the regulationspromulgated by the FDIC. This sectionalso clarifies that the administrativeclaims process will not apply to claimstransferred to a bridge financialcompany or to third parties.

Definitions

Section 380.31 of the Proposed Ruledefines the term claim to have thesame meaning as in section 201(a)(4) ofthe Dodd-Frank Act, specifically, anyright to payment, whether or not such

right is reduced to judgment, liquidated,unliquidated, fixed, contingent,matured, unmatured, disputed,undisputed, legal, equitable, secured, orunsecured. (This definition is generallyconsistent with the definition of theterm in the Bankruptcy Code.) TheProposed Rule uses the definition ofclaim as set forth in section 201(a)(4)of the Act, but adds language to thedefinition to specify that a claim is aright to payment from either the coveredfinancial company or the FDIC asreceiver. The clarification that claims

against the receiver are subject to theadministrative claims process isnecessary because section 210(a)(9)(D)divests a court of jurisdiction overclaims against the receiver until theadministrative claims process has beenexhausted. If claims against the receiverwere not first determined pursuant tothe administrative claims process, no

court would ever have jurisdiction overthese claims. The terms Corporation,Corporation as receiver, and receiverare used interchangeably in the statute,and the Proposed Rule clarifies thatsuch terms refer to the FDIC in itscapacity as receiver of a coveredfinancial company.

Claims Bar Date

Section 380.32 of the Proposed Rulereflects the statutory requirement thatthe FDIC as receiver establish a claims

bar dateby which creditors of thecovered financial company are to filetheir claims with the receiver. Theclaims bar date must be identified in

both the published notices and themailed notices required by the statutoryprocedures. The Proposed Rule clarifiesthat the claims bar date is calculatedfrom the date of thefirstpublishednotice to creditors, not from the date ofappointment of the receiver.

Notice Requirements

Section 380.33 of the Proposed Rulereiterates the statutory procedures fornotice to creditors of the coveredfinancial company. As required by thestatute, upon its appointment as

receiver of a covered financial company,the FDIC as receiver will promptlypublish a first notice; subsequently, thereceiver will publish a second and thirdnotice one month and two months,respectively, after the first notice ispublished. The notices must informcreditors to present their claims to thereceiver, together with proof, by no laterthan the claims bar date. The ProposedRule provides that the notices shall bepublished in one or more newspapers ofgeneral circulation in the market wherethe covered financial company had itsprincipal place of business. In

recognition of the publics growingreliance on communication using theInternet as well as the prevalence ofonline commerce, the Proposed Ruleprovides that in addition to thepublished and mailed notices, the FDICmay post the notice on its public Website.

In addition to the publication noticerequired by paragraph (a) of this section,the receiver must mail a notice that issimilar to the publication notice to eachcreditor appearing on the books andrecords of the covered financial

company. The mailed notice will besent at the same time as the firstpublication notice to the last address ofthe creditor appearing on the books orin any claim filed by a claimant. TheProposed Rule provides that aftersending the initial mailed noticerequired under paragraph (b), the FDICmay communicate by electronic media

(such as e-mail) with any claimant whoagrees to such means of communication.

Paragraph (d) of 380.33 clarifies thetreatment of creditors that arediscovered after the initial publicationand mailing has taken place. The FDICas receiver shall mail a notice similar tothe publication notice to any claimantnot appearing on the books and recordsof the covered financial company nolater than 30 days after the date that thename and address of such claimant isdiscovered. If the name and address ofthe claimant is discovered prior to theclaims bar date, such claimant will be

required to file the claim by the claimsbar date. There may be instances whennotice to the discovered claimant is sentimmediately before the claims bar date,possibly giving the claimant insufficienttime to prepare and file a claim beforethe claims bar date. In such a case, theclaimant may invoke the statutoryexception for late-filed claims set forthin section 210(a)(3)(C)(ii) and 380.35(b)(3) of the Proposed Rule inorder to overcome the claims bar datefiling requirement.

When a claimant is discovered by thereceiver after the claims bar date, thereceiver must still provide mailed notice

that is similar in content to thepublication notice required by section210(a)(2)(C). Such a discovered claimantcannot comply with a claims bar datethat has already passed. Therefore, theProposed Rule adopts a procedure forproviding another time frame for filinga claim which parallels the statutorytime frame mandated by section210(a)(2)(B); i.e., no earlier than 90 daysfrom the first publication notice. Thus,although a claimant discovered after theclaims bar date will be given 90 days tofile its claim, the failure to file a claim

by the end of that 90 day period will

result in disallowance of the claim.Procedures for Filing Claims

Section 380.34 of the Proposed Ruleprovides guidance to potentialclaimants regarding certain aspects offiling a claim. The FDIC as receiver hasdetermined to provide creditors withinstructions as to how to file a claim inseveral different formats. These willinclude providing FDIC contactinformation in the publication notice,providing a proof of claim form andfiling instructions with the mailed



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notice, and posting a link to the FDICson-line non-deposit claims processingWeb site. A claim will be deemed filedwith the receiver as of the date ofpostmark if the claim is mailed or as ofthe date of successful transmission if theclaim is submitted by facsimile orelectronically.

This section also confirms existing

law that each individual claimant mustsubmit its own claim and that no singleparty may assert a claim on behalf of aclass of litigants. On the other hand, atrustee named or appointed inconnection with a structured financialtransaction or securitization ispermitted to file a claim on behalf of theinvestors as a group because in such acase the trustee legally owns the claim.

The Proposed Rule reiterates 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. TheProposed Rule clarifies, however, thatthe claimant cannot continue its legalaction until after the receiverdetermines the claim.

Determination of Claims

Section 380.35 of the Proposed Rulereflects the receivers statutory authorityto allow and disallow claims. The FDICas receiver may disallow all or anyportion of a claim, including a claim

based on security, preference, setoff orpriority, which is not proved to the

receivers satisfaction. Pursuant to thestatutory directive, the receiver mustdisallow any claim that is filed after theclaims bar date, subject to the statutoryexception for late-filed claims. Underthis exception, a late-filed claim will not

be disallowed if (i) the claimant did nothave notice of the appointment of thereceiver in time to file by the claims bardate, and (ii) the claim is filed in timeto permit payment by the receiver.

The Proposed Rule establishes thatclaims that do not accrue until after theclaims bar date may not be disallowed

by the receiver as untimely filed. Claims

of this type may include claims basedon the post-claims bar date repudiationof a contract, or acts or omissions of thereceiver. In this regard, the ProposedRule adopts the FDICs interpretation ofthe application of the late-filed claimexception of the FDI Act to these typesof claims. See Heno v. Federal DepositInsurance Corporation, 20 F.3d 1204(1st Cir. 1994). The Proposed Ruleconfirms that such claims will bedeemed to satisfy the statutory late-filedclaim exception. In addition, theProposed Rule provides a definition of

the phrase filed in time to permitpayment to refer to a claim that is filedat any time before the FDIC as receivermakes a final distribution from thereceivership of the covered financialcompany.

Decision Period

Section 380.36 of the Proposed Rule

reflects that under the statute thereceiver must notify a claimant of itsdecision to allow or disallow a claimprior to the 180th day after the claim isfiled. The Proposed Rule also providesthat the claimant and the receiver mayextend the claims determination period

by mutual agreement in writing. Inaccordance with the statute, the receivermust notify the claimant regarding itsdetermination of the claim prior to theend of the extended claimsdetermination period.

Notification of Determination

Section 380.37 of the Proposed Rulerequires the receiver to notify theclaimant of the determination of theclaim as required by the statute. Thenotification may be mailed to theclaimant as set forth in section210(a)(3)(A). The receiver may useelectronic media to notify claimantswho file their claims electronically. Ifthe receiver disallows the claim, thereceivers notification shall explain eachreason for the disallowance and advisethe claimant of the procedures requiredto file or continue an action in court.Consistent with the statute, theProposed Rule provides that for

purposes of triggering the procedures forseeking a judicial determination of theclaim, a claim shall be deemed to bedisallowed if the receiver does notnotify the claimant prior to the end ofthe 180-day determination period or anyextended claims determination periodagreed to by the receiver and theclaimant.

Procedures for Seeking Judicial Reviewof Disallowed Claim

Section 380.38 of the Proposed Ruleimplements the statutory procedures fora claimant to seek a judicial

determination of its claim after theclaim has been disallowed by the FDICas receiver. The courts standard ofjudicial review would be a de novoconsideration of the merits of the claim,not a judicial review of the receiversdetermination of the claim. The statutestates that a claimant may (i) file alawsuit on its disallowed claim in thedistrict court where the coveredfinancial companys principal place of

business is located, or (ii) continue apreviously pending lawsuit. TheProposed Rule clarifies that if the

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