Resolution Authority

KA2.1 Each jurisdiction should have a designated administrative authority or authorities responsible for exercising the resolution powers over firms within the scope of the resolution regime (“resolution authority”). Where there are multiple resolution authorities within a jurisdiction their respective mandates, roles and responsibilities should be clearly defined and coordinated.

KA2.2 Where different resolution authorities are in charge of resolving entities of the same group within a single jurisdiction, the resolution regime of that jurisdiction should identify a lead authority that coordinates the resolution of the legal entities within that jurisdiction.

KA2.3 As part of its statutory objectives and functions, and where appropriate in coordination with other authorities, the resolution authority should:

(i) pursue financial stability and ensure continuity of systemically important financial services, and payment, clearing and settlement functions;

(ii) protect, where applicable and in coordination with the relevant insurance schemes and arrangements, such depositors, insurance policy holders and investors as are covered by such schemes and arrangements;

(iii) avoid unnecessary destruction of value and seek to minimize the overall costs of resolution in home and host jurisdictions and losses to creditors, where that is consistent with the other statutory objectives; and

(iv) duly consider the potential impact of its resolution actions on financial stability in other jurisdictions.

KA2.4 The resolution authority should have the authority to enter into agreements with resolution authorities of other jurisdictions.

KA2.5 The resolution authority should have operational independence consistent with its statutory responsibilities, transparent processes, sound governance and adequate resources and be subject to rigorous evaluation and accountability mechanisms to assess the effectiveness of any resolution measures. It should have the expertise, resources and the operational capacity to implement resolution measures with respect to large and complex firms.

KA2.6 The resolution authority and its staff should be protected against liability for actions taken and omissions made while discharging their duties in the exercise of resolution powers in good faith, including actions in support of foreign resolution proceedings.

KA2.7 The resolution authority should have unimpeded access to firms where that is material for the purposes of resolution planning and the preparation and implementation of resolution measures.

Essential criteria

EC2.1 The legal framework clearly identifies one or more resolution authorities and provides it or them with a clear mandate. Where there are multiple resolution authorities, the resolution regime provides for the identification of a lead authority; sets out clear arrangements to coordinate the resolution of affiliated legal entities within that jurisdiction; and provides for a clear allocation of objectives, functions and powers of those authorities.

Description and findings re EC2.1

DFA. Title II sets out a multi-step process to activate the resolution regime provided therein, involving several authorities and leading to the appointment by the Treasury Secretary of the FDIC as a receiver for a covered financial company.⁵¹ Each of the authorities and agencies involved in such process acts according to its statutory mandate, as well as based on criteria prescribed by Title II (e.g., financial stability considerations).

Title II aims to provide the necessary authority to liquidate failing financial companies that pose a significant risk to the financial stability of the U.S. in a manner that mitigates such risk and minimizes moral hazard, so that, among other things, creditors and shareholders will bear the losses of the financial company, and management responsible for the condition of the financial company will not be retained.⁵²

The procedures and division of responsibilities between relevant authorities in the resolution of an insurance group under Title II have not yet been clearly defined and are subject to a significant degree of uncertainty. While it is possible, if the necessary conditions are met, for the FDIC to intervene at the level of a holding company of an insurance group under Title II, the resolution of any insurance company itself would be conducted under State law. However, where the State commissioner fails to take the “appropriate judicial action” within 60 days of a systemic risk determination, the FDIC “shall have the authority” to stand in the place of the relevant regulatory agency and to file the relevant judicial action.

The Federal and State authorities have not yet clarified, in a concerted manner, the precise roles that they would play in this process. First (as noted in EC 1.1), in circumstances where the FDIC would exercise its “backup authority” under Title II and initiate resolution proceedings against a

“covered” insurance company, it is not clear whether the FDIC would only initiate the proceeding

51 See also description and findings under EC1.1 and for Key Attribute 3.

52 DFA Section 204(a).

(afterwards stepping aside for the relevant State commissioner to conduct the proceeding) or whether it would take the place of the relevant State commissioner for the purposes of

conducting the entire proceeding. More generally, the Federal and State authorities have not yet agreed procedures outlining cooperation between the FDIC, other Federal agencies and State commissioners in the period before and within the 60 day window following the determination by the Treasury Secretary with respect to a covered insurance company. Moreover, the Federal and State authorities are still in the process of discussing the procedures that would apply to ensure effective cooperation in circumstances where the FDIC is engaging in a Title II resolution of an insurance holding company and/or its covered subsidiaries where the relevant State

commissioners may be engaged in the resolution of insurance companies within the group.

To deal with these practical issues, the Dodd-Frank Receivership Implementation Working Group of the Receivership & Insolvency (E) Task Force of NAIC has laid out a possible framework for state implementation of the receivership under DFA, which is reflected in the Guideline for

Implementation of State Orderly Liquidation Authority (MDL#1700). While these procedures have not yet been agreed or implemented at the State level, they contemplate an approach under which the commissioner may file a petition for an order of resolution upon certain grounds, including upon determination by the Secretary of Treasury that the insurance company is a financial company satisfying the requirements of such definition under DFA, with a requirement for an expedited (i.e., 24 hour) hearing.

It should be noted that the FDIC, as a receiver, is required to consult with the primary financial regulatory agencies (such as the state commissioner with respect to insurance companies) of the covered financial company and its subsidiaries for the purposes of ensuring an orderly liquidation of the covered financial company and coordinate with respect to the treatment or resolution, as the case may be, of such subsidiaries.⁵³ Aside from the issues noted above with respect to

insurance group, coordination in the resolution of affiliated legal entities may be facilitated by the FDIC authority to act as the receiver for the covered financial company as well as, subject to certain circumstances, for subsidiaries of covered financial companies.

Banking. Under the FDI Act, the FDIC is the resolution authority for all insured depository institutions, including systemically important ones. The FDIC was established to insure the deposits of all banks and savings associations entitled to the benefits of insurance.

As regards branches of foreign banking organizations, in case of a state licensed branch the state regulator will appoint a receiver. In case of a federal licensed branch, the receiver will be

appointed by the OCC in accordance with Federal law.

State Insurance. The state insurance resolution regime designates the commissioner as receiver who takes possession of the insurer in resolution.

State insurance resolution law gives the relevant state commissioner the authority to initiate and conduct receivership proceedings respecting any insurance company “domiciled” in its

jurisdiction. In such a proceeding, the state commissioner will marshal the assets of the insurer wherever they are located and use them for the purposes of restructuring the company or distributing the proceeds to policy holders and, to the extent proceeds remain, to other

associations and funds. Arrangements are in place to ensure coordination with and between state guaranty associations and policy guaranty funds through the coordinating role played by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and the National Conference of Insurance Guaranty Funds (“NCIGF) respectively.

53 DFA Sections 204 (c).

Arrangements are also in place for coordination between state commissioners in the event of an interstate receivership, although the rules governing such receiverships at the state level are, to some degree, inconsistent between states. Under these arrangements, the principal “domiciliary”

receivership proceeding will be conducted in the state of the company’s domicile, while “ancillary”

proceedings may be conducted in other states subject to certain conditions. The Insurer

Receivership Model Act (IRMA, 2005) provides that any receivership order granted by the court in the domiciliary state will immediately be given full faith and credit in any other state. It precludes commissioners in other states from commencing ancillary proceedings without the consent of the domiciliary receiver and effectively requires that any such proceedings be conducted in a manner that supports the domiciliary receivership. Earlier model laws which still apply in many states provide a somewhat less complete framework and distinguish between ancillary proceedings launched against insurers that are domiciled in “reciprocal” or “nonreciprocal” states. While ancillary proceedings related to receiverships in reciprocal states are generally required to support the domiciliary proceeding, greater flexibility is provided with respect to proceedings involving insurers in non-reciprocal states. Moreover, there have been cases where domiciliary receivers have encountered difficulties ensuring that orders (e.g., stays on execution) of the domiciliary receivership court are enforced in other states or that ancillary proceedings are conducted in a manner that fully supports the domiciliary receivership.

Findings. The U.S. legal framework provides for a number of detailed provisions that identify the responsibilities of the various U.S. authorities in the resolution process under Title II, and vest the FDIC with authority as a receiver. The authorities have been working on the “three key process”, detailing their roles and interaction in the commencement of a Title II proceeding. While the role of the FDIC as resolution authority is clearly defined in line with EC 2.1, , it is recommended that the procedural, internal rules guiding the interaction among the various U.S. authorities involved in the resolution process be finalized.

The procedures and division of responsibilities between relevant authorities in the resolution of an insurance group under Title II have not yet been clearly defined and are subject to a significant degree of uncertainty. Without prejudice to the findings under KA 1, it is recommended that the Federal and state authorities clarify the roles that they would play in this process.

Under the state insurance resolution regime, the responsibilities of the commissioner as receiver and of the receivership court are clearly defined, although there is a small risk that the actions of a domiciliary receiver may not be supported by commissioners in all states in which the insurer did business.

EC2.2 The statutory objectives and functions of the resolution authority include those set out in KA 2.3, as applicable to the sectoral responsibilities of the authority. Where the exercise of resolution powers requires court involvement, the objectives of that involvement are aligned with the statutory objectives and functions set out in KA 2.3.

Description and findings re EC2.2

DFA. In taking its action under Title II, the FDIC shall:

 determine that such action is necessary for purposes of the financial stability of the U.S., and not for the purpose of preserving the covered financial company;

 ensure that the shareholders of a covered financial company do not receive payment until after all other claims and the Orderly Liquidation Fund are fully paid;

 ensure that unsecured creditors bear losses in accordance with the priority of claim provisions defined under Title II;

 ensure that management responsible for the failed condition of the covered financial company is removed;

 ensure that the members of the board of directors (or body performing similar functions) responsible for the failed condition of the covered financial company are removed; and

 not take an equity interest in or become a shareholder of any covered financial company or any covered subsidiary.⁵⁴

The Dodd-Frank Act prescribes that no taxpayer funds shall be used to prevent the liquidation of any financial company and that taxpayers shall bear no losses from the exercise of any authority under Title II. In exercising its authority, the FDIC shall, to the greatest extent practicable, maximize the net present value return from the sale or disposition of any asset, minimize the amount of any loss realized in the resolution of cases, and mitigate the potential for serious adverse effects to the financial system.

Continuity of systemically important financial services, as well as payment, clearing and settlement functions, may be ensured by the FDIC succeeding to all rights, titles, powers, and privileges of the covered financial company, performing all functions of such company.⁵⁵ In this respect, the FDIC can arrange for the transfer of the entity’s QFCs, establish a bridge institution, and allow parties to netting contracts to exercise their rights under those contracts.⁵⁶ As a receiver, the FDIC is

authorized to make funding available to the receivership for the orderly liquidation of the covered financial company, which may in principle include funds for the continuation of operations, such as payment, clearing, and settlement obligations.⁵⁷

The FDIC shall coordinate to the maximum extent possible with appropriate foreign regulatory authorities regarding the resolution of any failed financial company that has any assets or operations in a country other than the U.S.

The appointment by the Treasury Secretary of the FDIC as a receiver under Title II is subject to review by the U.S. District Court for the District of Columbia, if the board of directors of the financial company does not consent or acquiesces to such appointment. The court shall decide, on a strictly confidential basis, whether the determination made by the Treasury Secretary that the company is a financial company and is in default or in danger of default is arbitrary and capricious.

If the court does not make a determination within 24 hours of receipt of the petition, liquidation under Title II shall automatically commence.

With respect to the resolution of an insurance company under the FDIC back-up authority, it is not clear whether the state receivership proceeding would only need to be conducted in accordance with the objectives for receivership under state law or whether the objectives for orderly

liquidation under DFA would also apply (see EC 1.1).

Banking. The FDIC may not exercise its authority to use certain resolution powers under the FDI Act in connection with an IDI, unless it determines that (i) the exercise of such authority is necessary to meet the obligation of the FDIC to provide insurance coverage for the insured deposits in such institution; and (ii) the total amount of the expenditures by the FDIC and

54 DFA Section 206.

55 DFA Section 210(a)(1).

56 See DFA Section 210(c)(9) (with respect to the transfer of qualified financial contracts); Section 210(h) (with respect to bridge institutions); and Section 210(c)(8)(A)(iii) (with respect to netting contracts).

57 DFA Section 204(d).

obligations incurred by the FDIC in connection with the exercise of any such authority is the least costly to the deposit insurance fund of all possible methods for meeting the FDIC’s obligations.⁵⁸ Meeting this least cost test is not required, and the FDIC may take other action or provide assistance for the purposes of winding up an insured depository institution,⁵⁹ if, upon written recommendation of the FDIC and the Federal Reserve Board, the Treasury Secretary determines that (i) compliance with the least cost test would have serious adverse effects on economic conditions or financial stability in the U.S., and (ii) such action or assistance would avoid or mitigate such adverse effects.

The FDIC shall conduct its operations as receiver in a manner that, among other things,

(i) maximizes the net present value return from the sale or disposition of the assets of the failed IDI; and (ii) minimizes the amount of loss realized in the resolution of cases.⁶⁰

The FDIC maintains and administers the deposit insurance fund, which shall not be used to benefit any shareholder or affiliate of any IDI for which the FDIC has been appointed receiver. Payment of insured deposits shall be made by the FDIC as soon as possible after liquidation or winding up of an IDI, either in cash or by making available to each depositor a transferred deposit in another or in a new IDI.⁶¹

The FDIC has powers analogous to those granted under Title II, noted above, aimed at ensuring continuity of systemically important financial services, payment, clearing and settlement functions, by succeeding to all rights, titles, powers and privileges of the IDI, transferring any asset or liability of the failed IDI, collecting all obligations and moneys due to the IDI, ensuring that the failed IDI’s shareholders do not receive payment until all other claims have been paid, transferring QFCs, and organizing bridge depository institutions.⁶² Once appointed as receiver of a failed IDI, the FDIC is not subject to the direction of any other agency or department of the United States or any state in the exercise of its rights, powers, and privileges.⁶³

State Insurance. The overarching statutory objective of the resolution authority under the state insurance resolution law is to protect policyholders, creditors and general public. The protection of the business of insurance is seen to be a matter of vital public interest and concern.

The objectives and functions of state insurance resolution regimes do not appear to focus, either explicitly or implicitly, on the protection of financial stability more broadly or on the preservation of critical functions except to the extent that these concepts are encompassed within the

protection of policyholders, creditors or the public.

Avoiding unnecessary destruction of value and seeking to minimize the overall costs of resolution as well as losses to creditors are within the scope of the legislative objectives.⁶⁴ State resolution frameworks do not appear to require or contemplate the resolution authority giving due

58 FDI Act, 12 USC. § 1823(c)(4).

59 Title XI of the DFA curtailed the systemic risk exception (SRE) authority of the FDIC. This authority can now only be used for IDIs placed into receivership and wound down and not used for open bank assistance.

60 FDI Act, 12 USC. § 1821(d)(13)(E).

61 FDI Act, 12 USC. § 1821(a)(4) and (f)(1).

62 FDI Act, 12 USC. § 1821(d)(2); FDI Act, 12 USC. § 1821(e)(9); FDI Act, 12 USC. § 1821(n).

63 FDI Act, 12 U.S.C. § 1821 (c) (2) ( C) and (c) (3) (C).

64 See IRMA Section 101 E (2)(3)(4)(5).

consideration to the impact of its resolution measures on financial stability in other jurisdictions.

Findings. The statutory objectives and functions of the FDIC as resolution authority are broadly in line with those in KA 2.3, in that, as appropriate under Title II and the FDIC Act, they entail the preservation of financial stability, the protection of depositors, and the minimization of losses in resolution. Furthermore, under the DFA, the FDIC as resolution authority is required to coordinate to the maximum extent possible with appropriate foreign regulatory authorities regarding the resolution of any financial failed financial company.

In particular, Title II and the FDI Act provide for statutory objectives and responsibilities of the FDIC as resolution authority aimed at ensuring continuity of critical banking and financial services.

In particular, Title II and the FDI Act provide for statutory objectives and responsibilities of the FDIC as resolution authority aimed at ensuring continuity of critical banking and financial services.