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FDIC Unveils Proposed Rule Implementing Contract Enforcement Section of Dodd-Frank Act

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The Federal Deposit Insurance Corp. is proposing a rule with request for comments that implements section 210(c)(16) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, according to an FDIC notice issued today.

The FDIC, Washington, D.C., released the notice of the proposed rule today in the Federal Register (Volume 77, No. 59). The rule concerns enforcement of subsidiary and affiliate contracts by the FDIC as a receiver of a financial institution covered by the rule.

The rule would implement 12 U.S.C. section 5390(c)(16), which permits the FDIC, as a receiver for a financial company whose failure poses a “significant risk” to the U.S. economy’s financial stability to enforce contracts of subsidiaries or affiliates of the covered financial institution. The contract enforcement, the notice indicates, would happen “despite contract clauses that purport to terminate, accelerate or provide for other remedies based on the insolvency, financial condition or receivership of the covered financial company.”

The notice adds the proposed rule would clarify that the power of the FDIC as a receiver to enforce contracts of subsidiaries and affiliates under Dodd-Frank Act section 210©(16) effectively “preserves contractual relationships of subsidiaries and affiliates of the covered financial company during the orderly liquidation process.” The rule would identify certain contacts that are “linked to” the covered financial company with the meaning of the statute, as well as contracts that are also “supported by” the covered financial company.

The proposed rule, the notice says, would establish that if the subsidiary’s obligations under the linked contract are supported by the covered financial company through, for example, guarantees or the granting of collateral that supports the obligations, the FDIC as receiver must either transfer support (along with all related assets and liabilities) to a qualified transferee or provide “adequate protection to contract counterparties after giving notice to the counterparties.”

The proposed rule, the notice adds, would also clarify the meaning of the statutory provision regarding a contractual obligation that is “guaranteed or otherwise supported by” the covered financial company. The rule would apply to all contracts, and not solely to qualified financial contracts.

The notice additional states the rule “does not affect other provisions of the Dodd-Frank Act governing qualified financial contracts.”

The FDIC says it must receive written comments on the proposed rule no later than May 29, 2012. Comments may be submitted to the agency web site or via e-mail with RIN 3064-AD94 in the message’s subject line.


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