Restrictions on Sale of Assets of a Failed Institution by the Federal Deposit Insurance Corporation

SUMMARY: With this final rule, the Federal Deposit Insurance Corporation (FDIC) is revising its rule concerning restrictions on the sale of assets of a failed institution under the Federal Deposit Insurance Act in order to clarify the purpose, scope and applicability of that rule and to make that rule more consistent with the FDIC's rule concerning restrictions on the sale of assets of a covered financial company under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

EFFECTIVE DATE: This final rule is effective July 1, 2015.

FOR FURTHER INFORMATION CONTACT: James D. Sigler, Senior Franchise and Asset Marketing Specialist, 571-858-8284; Elizabeth Falloon, Supervisory Counsel, Legal Division, 703-562-6148; Shane Kiernan, Counsel, Legal Division, 703-562-2632; Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

The FDIC promulgated part 340 in 2000 to implement section 11(p) of the Federal Deposit Insurance Act, (12 U.S.C. 1821(p) (section 11(p)). Under section 11(p), individuals or entities whose acts or omissions have, or may have, contributed to the failure of an insured depository institution (failed institution) cannot buy the assets of that failed institution from the FDIC. The FDIC expanded the purchaser eligibility restriction as permitted by statute when it promulgated part 340 by precluding such individuals or entities from purchasing the assets of any failed institution, not only the particular institution affected by the actions of the respective individuals or entities. As provided in section 11(p), part 340 also prohibits the sale of assets involving FDIC financing to certain persons who have defaulted on obligations of $1 million or more, in aggregate, owed to a failed insured depository institution or the FDIC and who have made fraudulent misrepresentations in connection with any of those obligations. Compliance with part 340 is established through a self-certification process in which a prospective purchaser certifies that it is eligible to purchase an asset from the FDIC and that the FDIC's sale of an asset to such prospective purchaser would not be restricted under section 11(p) or part 340.

In March of 2014, the FDIC promulgated SEC 380.13 to implement section 210(r) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, (12 U.S.C. 5390(r) (section 210(r)). Section 210(r) prohibits certain sales of assets held by the FDIC in the course of liquidating a covered financial company. Because section 210(r) and section 11(p) share substantially similar statutory language, part 340 served as a model for the development of SEC 380.13. While many aspects of part 340 were included in SEC 380.13, FDIC staff identified new or different concepts to include in SEC 380.13 that were not already in part 340. The addition of these concepts into part 340 will improve part 340 and make it more consistent with SEC 380.13.

II. Notice of Proposed Rulemaking

On October 21, 2014, the Board of Directors approved a notice of proposed rulemaking entitled "Restrictions on Sale of Assets by the Federal Deposit Insurance Corporation " (the proposed rule), which was published in the Federal Register on October 24, 2014 with a 60-day comment period that ended on December 23, 2014. /1/ One comment letter addressing the proposed rule was received by the FDIC expressing general support for the proposed rule. The final rule is substantively the same as the proposed rule.

FOOTNOTE 1 79 FR 63580. END FOOTNOTE

III. The Final Rule

With this final rule, the FDIC is adopting the revisions to part 340 in substantially the same form as they were presented in the proposed rule. Part 340 is revised in a number of ways. Some revisions are significant, substantive changes and others are non-substantive, technical or conforming changes. This supplemental information section describes the substantive changes made by the final rule.

The title of part 340 is revised to clarify that part 340 applies to sales of assets of a failed institution (specifically, a failed insured depository institution). This change is made to help distinguish part 340 from SEC 380.13, which applies to sales of assets of a covered financial company by the FDIC. While the two rules will preclude sales to certain prospective purchasers in a very similar manner, each pertains to a separate set of asset sales by the FDIC.

The final rule amends SEC 340.1(b), which sets forth the purpose of part 340, to extend the restrictions on sales of assets of a failed institution to individuals or entities who are also prohibited from purchasing assets of a covered financial company from the FDIC under section 210(r) and SEC 380.13. This ensures consistency between part 340 and SEC 380.13. Under SEC 380.13, individuals or entities prohibited from purchasing assets of a failed institution under part 340 are also prohibited from purchasing assets of a covered financial company under SEC 380.13. Likewise, individuals or entities prohibited from purchasing assets of a covered financial company under SEC 380.13 are prohibited from purchasing assets of a failed institution under part 340.

The final rule makes three changes to clarify part 340's scope of coverage, set forth in SEC 340.1(c). First, the final rule clarifies the applicability of part 340 to sales of assets by a subsidiary of a failed institution or by a bridge depository institution. Sales of assets of a failed institution's subsidiary or a bridge depository institution are not expressly subject to section 11(p). However, if the FDIC has the right to control the terms of a sale of assets of a failed institution's subsidiary or a bridge depository institution, or has the ability to control selection of the purchaser of those assets under an agency agreement or as shareholder, the restrictions set forth in section 11(p) and part 340 should apply. The FDIC has discretionary authority to expand the scope of coverage because section 11(p) sets the minimum requirements for restrictions on sales of assets, and the FDIC may prescribe further restrictions on its own accord. Under the final rule's revision of part 340, the restrictions apply to sales of assets of a failed institution's subsidiary or a bridge depository institution if the FDIC controls the terms of the sale by agreement or as shareholder.

Second, the final rule amends SEC 340.1 to explicitly state that part 340 does not apply to certain types of transactions involving marketable securities and other financial instruments. Under SEC 340.1(c)(5), a sale of a security or a group or index of securities, a commodity, or any qualified financial contract that, in each case, customarily is traded through a financial intermediary where the seller cannot control selection of the purchaser would not be covered by part 340 if the sale is to be consummated through that customary practice. For example, if the FDIC were to sell publicly-traded stocks or bonds that the failed institution held, it might engage a broker or custodian to conduct or facilitate the sale. The broker or custodian would then tender the securities to the market and accept prevailing market terms offered by another broker, a specialist, a central counterparty or a similar financial intermediary who would then sell the security to another purchaser. In this scenario, it is not possible for the FDIC to control selection of the end purchaser at the time of sale. Therefore, the transaction cannot be a sale covered by section 11(p) because the FDIC would have no way to select the prospective purchaser or determine whether that purchaser would or would not be prohibited from purchasing the asset. Moreover, a prospective purchaser of such assets will not be able to select the FDIC as the seller and therefore could not determine whether section 11(p) and part 340 apply to the transaction. The final rule defines the term "financial intermediary," as discussed below, for the purposes of part 340. This express limitation on the scope of part 340's coverage will provide greater certainty regarding the applicability of section 11(p) and part 340 to market participants and FDIC staff who conduct asset sales.

Third, the final rule clarifies in SEC 340.1(c)(6) that part 340 is not applicable to a judicial sale or a trustee's sale of property securing an obligation to the FDIC if the sale is not conducted or controlled by the FDIC. Although the FDIC could have a security interest in property serving as collateral and therefore the authority to initiate a foreclosure action, the selection of the purchaser and terms of the sale are not necessarily within the FDIC's control. Rather, a court or trustee would conduct the sale in accordance with applicable state law and would select the purchaser. In this situation, the sale is not a sale by the FDIC. While the plain language of part 340 does not suggest that such a sale would fall within its scope, the FDIC makes this change for the sake of clarity. This exception does not affect sales if the FDIC is in possession of the collateral property and conducts the sale itself, however. Where the FDIC has control over the manner and terms of the sale, it will require the prospective purchaser's certification that the prospective purchaser is not prohibited under section 11(p) or part 340 from purchasing the asset.

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "12 CFR Part 340"

RIN Number: "RIN 3064-AE26"

Citation: "80 FR 22886"

Federal Register Page Number: "22886"

"Rules and Regulations"