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2.2 Process for Designating a Covered Financial Company for Orderly Liquidation

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2.2 Process for Designating a Covered Financial Company for Orderly Liquidation

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2.2.       Process for Designating a Covered Financial Company for Orderly Liquidation.  The Act establishes a multi-step, high-level process for determining whether to place a company in receivership that may include a prior judicial approval component that is not present in the depository institution receivership process.

            2.2.1.      Recommendation of the Fed and the FDIC Regarding a Receivership to the Treasury Secretary.  As a general matter, the Fed and the FDIC, either on their own initiative or at the request of the Treasury Secretary, are responsible for considering whether to make a recommendation as to whether the Treasury Secretary should appoint the FDIC as receiver for a financial company.  [§203(a)]  In the case of an insurance company that is a covered financial company or a subsidiary or affiliate of such a company, the liquidation will be conducted under state law either by the appropriate regulatory agency or the FDIC on a backup basis. 

A receivership recommendation must be approved by a vote of at least 2/3's of the members of the board of directors of both the Fed and the FDIC.  In the case of a broker or dealer, the FDIC's role is assigned to the SEC. In the case of an insurance company, the FDIC's role is assigned to the Director of the Federal Insurance Office.

The written recommendation must, among other things, contain:

·         an evaluation of whether the financial company is in default or in danger of default (such terms being satisfied if (i) a case has been, or likely will promptly be, commenced with respect to the company under the Bankruptcy Code, (ii) the financial company has incurred, or is likely to incur losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the company to avoid such depletion, (iii)  the assets of the financial company, are, or are likely to be, less that its obligations to creditors and others,  or (iv) the financial company is, or is likely to be, unable to pay its obligation in the normal course of business);

 

·         a description of the effect that the default would have on financial stability in the U.S.;

 

·         a recommendation regarding the nature and extent of actions to be taken under Title II regarding the financial company;

 

·         an evaluation of the likelihood of a private sector alternative to prevent default of the financial company;

 

·         an evaluation of why a case under the Bankruptcy Code is not appropriate for the financial company;

 

·         an evaluation of the effects on creditors, counterparties, and shareholders of the financial company and other market participants; and

 

·         an evaluation of whether the company qualifies as a financial company.

 

2.2.2.      Determination for Receivership by the Treasury Secretary.  A receiver for a financial company will be appointed (subject to judicial review) if, upon the written recommendation of the Fed and the FDIC (or other applicable Federal regulatory agency), the Treasury Secretary, in consultation with the President, determines that:

·         the financial company is in default or in danger of default;

·         the failure of the financial company and its resolution under other applicable law  would have serious adverse effects on financial stability in the U.S.;

 

·         no viable private sector alternative is available to prevent the default of the financial company;

 

·         any effect on the claims or interests of creditors, counterparties, and shareholders of the financial company and other market participants, as a result of actions to be taken under Title II is appropriate given the impact that any action taken under Title II would have on financial stability in the U.S.;

 

·         any action involving the appointment of a receiver would avoid or mitigate such adverse effects, taking into account the effectiveness of the action in mitigating potential adverse effects on the financial system, the cost to the general fund of the Treasury, and the potential to increase excessive risk taking on the part of creditors, counterparties, and shareholders in the financial company;

 

·         a Federal regulatory agency has ordered the financial company to convert all of its convertible debt instruments that are subject to the regulatory order; and

 

·         the company qualifies as a financial company.  [§203(b)]

 

2.2.3.      Notice to Covered Financial Company; Judicial Approval.  Upon a determination by the Treasury Secretary to place a covered financial company in receivership, the Treasury Secretary must notify the FDIC and the company.  If the board of directors of the company acquiesces or consents to the appointment of the FDIC as receiver, the Treasury Secretary shall appoint the FDIC as receiver.  [§202]   The members of the board of directors of a covered financial company will not be liable to the shareholders or creditors thereof for acquiescing in or consenting in good faith to the appointment of the FDIC.  [§207]    

If the board of directors of the company does not acquiesce or consent to the appointment of the FDIC, the Treasury Secretary is required to petition the U.S. District Court for the District of Columbia for an order authorizing the Treasury Secretary to appoint the FDIC as receiver for the company. 

The Treasury Secretary must file the recommendations and the determination with the Court under seal.  The Court, with notice to the covered financial company, but on a strictly confidential basis, and without any prior public disclosure, is required to hold a hearing at which the company may oppose the Treasury Secretary's petition.  Any person who recklessly discloses a determination by the Treasury Secretary, the filing of a petition, or the pendency of a proceeding before the Court may be subject to criminal penalties.  The Court's review is limited to whether the Treasury Secretary's determination that (i) the covered financial company is in default or in danger of default, and (ii) that it qualifies as a financial company, is arbitrary and capricious. 

If the Court determines that the Treasury Secretary's determination is not arbitrary and capricious, the Court is required to issue an order authorizing the Treasury Secretary to appoint the FDIC as receiver.  If the Court, on the other hand, determines that the Treasury Secretary's determination is arbitrary and capricious, the Court shall provide a written statement of the reasons supporting its determination and provide the Treasury Secretary an immediate opportunity to refile the petition.

If the Court does not make a determination within 24 hours of receipt of the petition, the petition will be granted by operation of law, the Treasury Secretary shall appoint the FDIC as receiver, and the liquidation shall automatically be commenced.  Given the right of the covered financial company to have a hearing on the Treasury Secretary's petition, the 24 hour time limit for action by the Court creates an extraordinarily tight time schedule for the Court and the covered financial company.  In apparent recognition of this issue the Court is required, within 6 months of enactment of the Act, to issue rules and procedures as may be necessary to ensure the orderly conduct of the proceedings, including that the 24-hour deadline is met. 

 The decision of the Court is not subject to any stay or injunction pending appeal.  The covered financial company or the Treasury Secretary may appeal an adverse decision by the Court to the U.S. Court of Appeals for the District of Columbia Circuit.  The scope of the appeal is limited to the issues to have been considered by the Court.  Ultimately, either party can seek review by the Supreme Court, which will be limited to the same scope of review.              

If the FDIC is appointed as receiver for any covered broker or dealer (i.e., a covered financial company that is an SEC registrant and member of the Securities Investor Protection Corporation ("SIPC")), the FDIC is directed to appoint, without any need for court approval, the SIPC to act as trustee for the liquidation of the covered broker or dealer.  Additional provisions concerning the liquidation of a covered broker or dealer are contained in Title II, but are not discussed further in this summary.  [§205]