SIFMA today submitted comments to the Federal Deposit Insurance Corporation (FDIC) regarding implementation of the orderly liquidation authority contained in the Dodd-Frank Act.
“Dodd-Frank sought to address the notion of ‘too-big-to-fail,’ and we believe the Act’s establishment of an orderly liquidation authority will enable regulators to protect the taxpayers, all while ensuring the safety and soundness of our financial system,” said Kenneth E. Bentsen, Jr., executive vice president, public policy and advocacy at SIFMA. “The regulators, principally the FDIC, must establish a transparent and consistent process for resolving a failing institution in a time of crisis that preserves certainty for creditors within the financial markets. Failure to do so will undermine the Act’s intent of mitigating systemic risk.”
In general, SIFMA believes that for this new authority to work properly, the FDIC will need to issue rules and regulations that convince the markets that the authority will be exercised sparingly in the most extreme circumstances and periods of stress, and in a transparent and consistent manner that strikes the right balance among preserving or restoring financial stability, maximizing the value of the enterprise, preserving equal treatment among similarly situated creditors and maximizing market discipline.
Most importantly, SIFMA believes creditors need to have confidence that they could be better off if this authority is invoked than they would be in bankruptcy, but that they will never be worse off in order for the authority to have a stabilizing impact on the market during a financial crisis.
Additionally, SIFMA noted in its letter to the FDIC that many large, complex financial institutions have already taken steps to reduce their reliance on short term funding sources as a result of Basel III and the heighted prudential requirements in the Dodd-Frank Act.
SIFMA’s letter was separated into two parts. The first section addressed how orderly liquidation authority has the potential to address the dilemma of too-big-to-fail in the future. The second section contained specific comments in response to the FDIC’s notice of proposed rulemaking (NPR) along with an annex to the specific questions raised in the notice.
In the first section, SIFMA recommended that the FDIC reinforce a number of principles, including that:
- There is a strong presumption against invoking the orderly liquidation authority, except for systemically important financial companies under the most extreme circumstances during a financial crisis. Creditors should be able to rely on the Bankruptcy Code or other applicable insolvency law being the applicable law for liquidating, reorganizing or otherwise resolving the vast majority of troubled or insolvent financial companies. The FDIC will exercise its powers in a manner that preserves or restores liquidity during a financial panic and preserves equal treatment among similarly situated creditors, unless absolutely necessary to preserve or restore financial stability.
- The FDIC will exercise its powers in a transparent and consistent way that will reduce or eliminate the incentive of creditors to run or to cut off liquidity during a financial panic, such as by transferring a covered financial company’s liabilities to a viable third party or bridge financial company. The FDIC will provide as much advance legal certainty as possible regarding the rules governing the rights of creditors, counterparties and other stakeholders in a orderly liquidation proceeding, including the acceptance of “credit bids” from secured creditors who believe that the FDIC’s valuation is too low.
- The FDIC will seek to maximize a covered financial company’s value and minimize shareholder and creditor losses, rather than minimizing the company’s value and maximizing its losses by liquidating the company’s assets at the bottom of the market, consistent with the ultimate goals of maintaining and restoring financial stability.
- The FDIC will provide a clear administrative remedy for creditors who believe that they did not receive as much as they would have received in a liquidation under Chapter 7 of the Bankruptcy Code, in violation of their minimum recovery rights.
- The FDIC will preserve the continuous operation of any systemically important functions provide to the market by a covered financial company, such as payment systems, security settlement systems and similar critical functions relied upon by the market and for which there are few or no substitutes.
In the second section of the letter, SIFMA provided comments on specific aspects of the NPR that would create new rules covering:
- Restrictions on unequal treatment of similarly situated creditors—SIFMA believes the FDIC should not impose an absolute prohibition on making payments or credits to the holders of any particular class of claims or impose special FDIC Board approval requirements on exercising any of the statutory authorities given to the FDIC to make payments or credit to anyone if necessary to preserve or restore U.S. financial stability during a financial crisis.
- Valuation of Collateral—SIFMA believes that the rule should be either withdrawn or provide more specific, detailed information about the valuation process, including specifying the date of valuation for purposes of determining whether there is a deficiency claim.
- Personal Services Agreements—SIFMA believes it would not be good policy for the FDIC to announce by rule that it will not be bound by the terms of any employment contract with senior executives of a covered financial company, even where the FDIC accepts the executive’s services.
- Contingent Claims—SIFMA believes the rule should be revised to clarify that if the contingent claim becomes fixed before final distributions are made to creditors generally, the fixed amount should be the relevant amount rather than any estimate.
SIFMA will also be filing a second, separate letter to address specific questions raised in the FDIC’s NPR with a 90-day comment period. The association also intends to comment on the issues raised by the broker-dealer provisions, which are subject to joint rulemaking by the FDIC and the SEC in that letter.
A copy of the letter can be found at the following link: http://sifma.org/issues/item.aspx?id=22345
