On 18 January 2011, the Federal Deposit Insurance Corporation (“FDIC”) issued an interim final rule (the “Rule”) with request for comments regarding certain provisions of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd- Frank Act”). Title II creates the Orderly Liquidation Authority (“OLA”), which is a mechanism under which “covered financial companies” can be liquidated in a uniform fashion rather than under inconsistent insolvency regimes. “Covered financial companies” are those whose failure pose a significant risk to the financial stability of the United States. The liquidation or rehabilitation of an insurance company that is a covered financial company will still be conducted under relevant state law, but a subsidiary or affiliate (including a parent company) that is not itself an insurance company will be subject to orderly liquidation under Title II of Dodd-Frank Act.
The interim rule contained two sections that were specific to insurance companies.
Insurance Company Subsidiaries
Under Section 380.5 of the Rule, if the FDIC acts as receiver for a direct or indirect subsidiary of an insurance company, and that subsidiary is not itself an insured depository institution or an insurance company, the distribution of the value obtained from the liquidation will be governed by Section 210(b)(1) of the Dodd- Frank Act, which sets the priorities under the OLA for expenses and unsecured claims. In addition, the Rule requires that the receiver distribute all proceeds due to the parent insurance company under the order of priority provisions of Section 210 (b)(1) of the Dodd-Frank Act to ensure that the liquidation value will be available to the policyholders of the parent insurance company to the extent required by applicable state laws and regulations.
Liens on Insurance Company Assets
Section 380.6 of the Rule tightens the language used to permit the FDIC to take liens on the assets of an insurance company and the assets of the covered subsidiaries of an insurance company. The FDIC may finance the orderly liquidation of covered financial companies and covered subsidiaries by the means it deems necessary, within its discretion, including by taking liens under Section 204(d)(4) of the Dodd-Frank Act. Section 380.6 of the Rule states that the FDIC will take liens only when (i) the lien is necessary for an orderly liquidation, and (ii) the taking of the lien will not impede the liquidation of the insurance company or the recovery by policyholders. This ensures that the FDIC will not take liens on insurance company assets or on affiliated company assets unless the FDIC deems the lien an essential aspect of funding the liquidation, and will not interfere with a rehabilitation or liquidation under state law.
The FDIC has requested submissions of written comments relating to the Rule. Comments are due no later than 28 March 2011.