The FDIC board last Friday proposed a rule clarifying how the agency would treat certain creditor claims under the new orderly liquidation authority established under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposal advances the principle that all creditors must expect to absorb losses in any liquidation.
Title II of Dodd-Frank provides a mechanism for the appointment of the FDIC as receiver for a financial company where the failure of the company and its liquidation under the Bankruptcy Code or other insolvency procedures would pose a significant risk to the country’s financial stability.
The Notice of Proposed Rulemaking (NPR) requests comment on a proposed regulation on specific issues related to creditor claims and on broader questions to inform future rulemaking addressing other orderly liquidation issues under Dodd-Frank. The proposed regulation is open for public comment for 30 days after publication in the Federal Register, which is expected shortly. The questions for future rulemaking are open for public comment for 90 days after publication.
The proposal addresses the availability of additional payments to creditors under the authority of Dodd-Frank. The proposed rule would bar any additional payments to holders of long-term senior debt, subordinated debt, or equity interests that would result in those creditors recovering more than other creditors entitled to the same priority of payments under the law. Additional payments to holders of long-term senior debt, subordinated debt, or equity interests do not meet the statutory test that the payments must maximize the value of the assets or recoveries, minimize losses or be essential to implementation of the receivership or any bridge financial company. The NPR also proposes to clarify that all creditors must expect to absorb losses in any liquidation.
The proposal also provides that secured creditors will only be protected to the extent of the fair value of their collateral. To the extent that any portion of the claim is unsecured, it will absorb losses along with other unsecured creditors. Secured obligations collateralized with U.S. government securities will be valued at par.
“The proposed rule is the first step in giving market participants greater clarity and certainty about how certain key components of the resolution authority will be implemented,” FDIC Chairman Sheila Bair said in a press release. “Shareholders and unsecured creditors should understand that they, not taxpayers, are at risk.”
The proposal also addresses issues within the following broad areas:
- The authority to continue operations by paying for services provided by employees and others (by clarifying the payment for services rendered under personal services contracts);
- The treatment of creditors (by clarifying the measure of damages for contingent claims); and
- The application of proceeds from the liquidation of subsidiaries (by reiterating the current treatment under corporate and insolvency law that remaining shareholder value is paid to the shareholders of any subsidiary).
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