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FDIC Publishes Orderly Liquidation Authority Final Rule

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The Federal Deposit Insurance Corp. (FDIC) has completed work on regulations that could affect the steps it would take if it became the receiver of an insurance company or of an affiliate of an insurance company.

The FDIC developed the final rule — “Certain Orderly Liquidation Authority Provisions”– to implement parts of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Congress responded to concerns that regulatory gaps may have contributed to the Dodd-Frank compassseverity of the financial crisis that started in 2007 by giving federal financial services regulators, including the FDIC, broader jurisdiction.

The Dodd-Frank Act leaves most responsibility for dealing with problems at insurance companies with state insurance regulators. But, if a state fails to address problems at a large, systemically important insurance companies for 60 days, the FDIC has the authority under Dodd-Frank to oversee the resolution of the problems at the insurer under the insurance company receivership laws in effect in the company’s home state.

The FDIC is supposed to work with the new Financial Stability Oversight Council to determine which insurers are important enough and weak enough to need federal attention.

The FDIC issued a notice of proposed rulemaking in October 2010, and it released interim final regulations implementing the provisions in January. The FDIC inserted the regulations as Part 380, sections 380.1 through 380.6, in Title 12 in the Code of Federal Regulations (CFR).

The interim final rule addressed the “treatment of any remaining shareholder value in the case of a covered financial company that is a subsidiary of an insurance company and limitations on liens that the FDIC may take on the assets of a covered financial company that is an insurance company or a covered subsidiary of an insurance company,” FDIC officials said in a preamble to the new final rule.

In addition to FDIC handling of insurer-related insolvencies, the final rule also deals with other issues relating to financial company failures, such as the rules for clawing back compensation paid to the senior executives and directors responsible for a company’s failure.

The FDIC received a total of 31 responses to the proposed rule and the interim final rule, officials say.

Some commenters with an interest in bankruptcy law asked the FDIC to show as much deference as possible to bankruptcy laws, rules and processes, officials say.

Similarly, officials say, commenters from the insurance industry, “urged the greatest possible deference to state regulators and to state laws, rules and regulations governing insurance companies,” officials say. “One commenter has repeatedly requested clarification that mutual insurance holding companies will be treated as insurance companies for the purposes of the Dodd-Frank Act.”

In the interim final rule, “Section 380.5 provides that if the FDIC acts as receiver for a direct or indirect subsidiary of an insurance company and that subsidiary is not an insured depository institution or an

insurance company itself, the value realized from the liquidation of the subsidiary will be distributed according to the order of priorities set forth in the Dodd-Frank Act and will be available to the policy holders of the parent insurance company,” officials say.

No comments were received recommending changes to Section 380.5, and the sole revision to the section in the final rule is to include a reference to another section of the final rule, officials say.

Another section of the interim final rule, Section 380.6, “provides that the FDIC will avoid taking a lien on some or all of the assets of a covered financial company that is an insurance company or a subsidiary that is an insurance company unless it determines that taking such a lien is necessary for the orderly liquidation of the covered financial company and will not unduly impede or delay the liquidation or rehabilitation of the insurance company or the recovery by its policyholders,” officials say.

That section of the interim final rule has limited “the ability of the FDIC to take liens on insurance company assets and assets of the insurance company’s covered subsidiaries under certain circumstances after the FDIC has been appointed as receiver,” officials say.

“As discussed in the preamble of the notice of proposed rulemaking with respect to this rule, Section 204 of the Dodd-Frank Act provides that in the event that the FDIC as receiver of a covered financial company determines it to be necessary or appropriate, it may provide funding for the orderly liquidation of covered financial companies and covered subsidiaries by, among other things, making loans, acquiring debt, purchasing assets or guaranteeing them against loss, assuming or guaranteeing obligations, making payments, or entering into certain transactions,” officials say.

The FDIC is authorized to take liens ”on any or all assets of the covered financial company or any covered subsidiary, including a first priority lien on all unencumbered assets of the covered financial company or any covered subsidiary to secure repayment” of any advances made, officials say.

Officials note that some commenters on the interim final rule questioned the reference to liens on assets of an affiliate of a covered financial company as well as assets of a covered subsidiary.

When the FDIC is acting as a receiver, the Dodd-Frank Act gives it clear authority “to take a lien on the ‘assets of the covered financial company or any covered subsidiary to secure repayment of any transactions conducted,’” officials say.

The act suggests that the FDIC could be appointed as receiver for an affiliate of an insurance company that is not itself a subsidiary, but “it is clear that upon appointment, the affiliate would become a covered financial company, rendering the reference to ‘affiliates’ in Section 380.6 superfluous,” officials say. “The final rule has been revised accordingly to eliminate the reference to ‘affiliates’ of the covered financial company and to make clear that the rule applies only to covered subsidiaries of insurance companies.”

The new final rule is set to take effect Aug. 15.

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