BANKRUPTCY

Agencies Continue 

Rulemakings for 

Clarifying Specific

Provisions of Orderly 

Liquidation Authority

Report to Congressional Committees

July 2012

GAO-12-735

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-735, a report to 

congressional committees

July 2012

BANKRUPTCY

Agencies Continue Rulemakings for Clarifying

Specific Provisions of Orderly Liquidation Authority

Why GAO Did This Study

The Dodd-Frank Act created OLA for 

resolving failed, systemically important 

financial companies. Since the act was 

passed in 2010, regulators have been 

developing regulations to implement 

this authority and avoid disorderly 

resolutions that create substantial 

losses for the financial system. In July 

2011, GAO issued the first of its

statutorily mandated reports on the 

effectiveness of the Bankruptcy Code 

for resolving or liquidating complex, 

internationally active financial 

companies. Among the topics 

examined in this second report, GAO

reviewed: (1) federal rules or 

regulations relating to OLA and the 

resolution of financial institutions, 

including living wills; and (2) status of 

efforts to improve coordination on 

international resolutions, data 

collection efforts, and the outcomes of

financial institutions that were in the 

bankruptcy process.

To address these objectives, GAO

reviewed agencies’ draft and final rules 

related to OLA and comment letters 

submitted. GAO continued to monitor 

developments related to the Lehman 

Brothers and Washington Mutual 

bankruptcies, and began monitoring a 

recent bankruptcy filing by MF Global. 

GAO also studied available data on the 

number of financial company 

bankruptcies and met with relevant 

agency and court officials.

GAO makes no new recommendations 

in this report. GAO provided a draft for 

comment to AOUSC, the Department 

of the Treasury, and federal financial 

regulators. None provided written 

comments and technical comments 

have been incorporated, as 

appropriate.

What GAO Found

The federal financial regulators have issued certain final rules for resolving large, 

complex financial companies under the Dodd-Frank Wall Street Reform and 

Consumer Protection Act’s (Dodd-Frank Act) established Orderly Liquidation 

Authority (OLA). Under OLA, the Federal Deposit Insurance Corporation (FDIC)

could serve as receiver of a failing financial company instead of the company 

entering the bankruptcy process. Regulators continue to address a number of

issues related to FDIC’s new authority, including how creditors will ensure that 

they receive no less than they would under a Chapter 7 bankruptcy liquidation; 

how certain assets and liabilities would be treated in a new company created by 

FDIC under OLA; and what role the Securities Investor Protection Corporation 

would play in the resolution of a broker-dealer under OLA. Regulatory officials 

reported that they were continuing to draft rules to clarify how OLA would be 

used. FDIC and the Board of Governors of the Federal Reserve (Federal 

Reserve) also have issued final rules requiring certain financial companies to file 

resolution plans or “living wills” that must detail how companies would resolve 

their operations through an orderly bankruptcy. Regulators told GAO that the 

plans also would help FDIC plan for the exercise of its resolution authority, 

including OLA. The filing dates for these plans are phased in over the next year

and a half, with the first group of financial companies filing their first plans on July 

1, 2012. However, “nonbank financial companies” that also will need to provide 

plans have yet to be designated. 

International coordination remains a critical component in resolving the failure of 

a large, complex financial company and regulators have been taking steps to 

address this and are testing new data collection efforts. Specifically, efforts are 

under way to develop a universal legal entity identifier that allows companies to 

identify and manage risks from companies with which they are engaged in

financial transactions. This additional information could help regulators in 

resolving internationally active financial companies. Data to identify financial 

institutions filing for bankruptcy protection as well as their outcomes are limited. 

Since neither FDIC nor federal judicial agencies have a database that tracks

financial companies in bankruptcy, the Administrative Office of the U.S. Courts 

(AOUSC) and the Federal Judicial Center have begun a new effort to track

financial company bankruptcies, but reported court data are untested for this 

purpose. Several large financial institution bankruptcies are still in progress. Two 

of the largest financial company bankruptcies, Lehman Brothers Holdings Inc. 

(Lehman Brothers) and Washington Mutual, Inc.—both of which filed in 

September 2008—recently had their reorganization plans confirmed by creditors 

and approved by the courts. However, these cases are not yet fully resolved. In 

the Lehman Brothers case, international litigation could take several years to 

resolve. The October 2011 bankruptcy of MF Global Holdings Ltd., a holding 

company with a securities and commodities broker, has raised concerns about 

how commodity customers are treated under a liquidation regime and also 

involves international litigation over customer property. These financial company 

bankruptcies highlight the challenges FDIC and other regulators would face in 

View GAO-12-735. For more information, resolving large, complex financial companies under the OLA process.

contact Alicia Puente Cackley at (202) 512-

8678 or cackleya@gao.gov.
Page i GAO-12-735 Bankruptcy

Letter 1 

Background 3

D.C. District Court Revised Its Rule for Judicial Review under OLA 15

Although Regulators Have Issued Rules Related to OLA, Some 

Clarifications Remain Outstanding 16

Financial Company Bankruptcies Remain Difficult to Track and 

Several Major Cases Move Forward 32

Agency Comments and Our Evaluation 41

Appendix I Objectives, Scope, and Methodology 44

Appendix II Status of Selected Rules Related to the Orderly Liquidation 

Authority and Resolution Planning under the Dodd-Frank Act 47

Appendix III GAO Contact and Staff Acknowledgments 50

Tables

Table 1: Deadlines for Submissions of Initial Resolution Plans, by 

Size of Financial Company 19

Table 2: Chapter 11 Mega-Bankruptcy Filings, by Total Filings and 

Financial Institution Filings, 2000 through 2011 34

Table 3: Selected Final Rules and Actions Completed, as of May 15, 

2012 47

Table 4: Selected Proposed Rules and Actions in Progress, as of 

May 15, 2012 48

Table 5: Selected Required Rules That Have Not Yet Been 

Proposed or Had Action as of May 15, 2012 49

Figure

Figure 1: Decision Process for Invoking OLA and Appointing FDIC 

Receiver of a Failing Financial Company 10

Contents
Page ii GAO-12-735 Bankruptcy

Abbreviations

AOUSC Administrative Office of the U.S. Courts

CFTC Commodity Futures Trading Commission

DIP debtor-in-possession

FDIC Federal Deposit Insurance Corporation

FSOC Financial Stability Oversight Council

LBIE Lehman Brothers International, Europe

LEI Legal Entity Identifier

OLA Orderly Liquidation Authority

SEC Securities and Exchange Commission

SIFI systemically important financial institutions

SIPA Securities Investor Protection Act

SIPC Securities Investor Protection Corporation

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

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Page 1 GAO-12-735 Bankruptcy

United States Government Accountability Office

Washington, DC 20548

July 12, 2012

Congressional Committees

The 2008 financial crisis and the failures of large, complex financial 

institutions led some experts to question the effectiveness of the United 

States Bankruptcy Code (Code) for resolving or liquidating these 

institutions without causing further harm to the financial system.1 In 

response, Congress created the Orderly Liquidation Authority (OLA) as 

part of the Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act).2

As well as creating OLA, the Dodd-Frank Act requires financial 

companies to file periodic resolution plans describing how they could be 

resolved in an orderly manner in the event of material financial distress or 

failure. These “living wills” are intended to allow companies and 

regulators to anticipate possible challenges to their resolution under the 

Code.

Under OLA, the Secretary of the Treasury may 

appoint the Federal Deposit Insurance Corporation (FDIC) as a receiver 

for certain insolvent financial companies that pose a risk to the financial 

stability of the United States. The Dodd-Frank Act requires FDIC to 

liquidate certain financial companies to maximize the value of the 

companies’ assets, minimize losses, mitigate systemic risk, and minimize 

moral hazard. OLA created a new process for resolving large, complex 

financial companies, but policymakers, academic experts, and industry 

participants have raised questions about whether this process would 

achieve the stated goals more effectively than the established bankruptcy 

process.

3

 

1

Insured depository institutions and insurance companies may not file for debtor protection

under the U.S. Bankruptcy Code, and broker-dealers qualify for liquidation, but not 

reorganization.

Some policymakers and other experts have questioned the 

usefulness of the resolution plans because of the range of scenarios that 

could lead to a financial institution’s failure.

2

Pub. L. No. 111-203, 124 Stat. 1376 (2010).

3

Pub. L. No. 111-203, Title I, § 165 (d). 123 Stat. 1376, 1426-1427 (2010), codified at 12 

U.S.C. § 5365(d).

 
 

Page 2 GAO-12-735 Bankruptcy

In July 2011, we issued the first of our statutorily mandated reports on the 

effectiveness of the Code for resolving or liquidating complex, 

internationally active, financial institutions.4

To address these objectives, we monitored the promulgation of rules 

through agency websites, legal journals, and legal searches. We 

examined comment letters on draft rules, attended webinars from law 

firms, and reviewed academic articles discussing the key challenges 

related to OLA and resolution plan rules.

Although OLA has not been 

invoked, we have been monitoring the development of rules and 

regulations related to OLA as well as the bankruptcies of large financial 

institutions. Specifically, this report examines: (1) actions the U.S. District 

Court for the District of Columbia (D.C. District Court) has taken in 

response to the judicial review provision of OLA, including any revisions 

to local civil rule 85; (2) federal rules or regulations relating to OLA and 

efforts to improve international coordination, including living wills, in 

resolving financial companies; and (3) data collection efforts and 

outcomes of financial institutions that were in the bankruptcy process.

5

 

4

See GAO, Bankruptcy: Complex Financial Institutions and International Coordination 

Pose Challenges, 

We continued to review court 

and regulatory documents to follow developments of two large financial 

company bankruptcies (Lehman Brothers Holdings, Inc. and Washington 

Mutual, Inc.) that we began tracking as case studies in our 2011 report. 

We also began tracking the more recent bankruptcy of MF Global 

Holdings Ltd. We analyzed available data on U.S. bankruptcies and 

determined that they were sufficiently reliable to provide some 

background information on the number of bankruptcies of large financial 

GAO-11-707 (Washington, D.C.: July 19, 2011) for the first study 

reported under this mandate. We must report on the judicial review for OLA and the 

effectiveness of the Code annually for 3 years after the passage of the act and every 5 

years after the date of enactment. Dodd-Frank Act § 202(e); 12 U.S.C. § 5382(e). The 

Administrative Office of the United States Courts also must conduct a study of bankruptcy 

and the process for orderly liquidation for financial companies. The Board of Governors of 

the Federal Reserve System has a similar requirement. Dodd-Frank Act § 216.

5

We also studied the reports related to the section 202(e) and section 216 mandates. See 

Administrative Office of the United States Courts, Report Pursuant to Section 202(e) of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Washington, D.C.: 

July 2011) and Board of Governors for the Federal Reserve System, Study of the 

Resolution of Financial Companies Under the Bankruptcy Code (Washington, D.C.: July 

2011). Pursuant to Dodd-Frank Act § 215, the Financial Stability Oversight Council 

(FSOC) in July 2011 published Report to Congress on Secured Creditor Haircuts, which 

examined allowing regulators to treat a portion of fully secured creditors’ claims as 

unsecured in a resolution proceeding.
 

Page 3 GAO-12-735 Bankruptcy

institutions from January 1, 2010, through December 31, 2011. Finally, 

we met with officials from the Administrative Office of the U.S. Courts 

(AOUSC), D.C. District Court, the Commodity Futures Trading 

Commission (CFTC), FDIC, the Board of Governors of the Federal 

Reserve System (Federal Reserve), Federal Judicial Center, Department 

of Justice (Justice), Securities and Exchange Commission (SEC), 

Securities Investor Protection Corporation (SIPC), and the Department of 

the Treasury (Treasury), including the Office of Financial Research. See 

appendix I for more information on our scope and methodology.

We conducted this performance audit from August 2011 to July 2012 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

Bankruptcy is a federal court procedure conducted under the Code. The 

goal of bankruptcy is to give individuals and businesses a “fresh start” by 

eliminating or restructuring debts they cannot repay and help creditors 

receive some payment in an equitable manner. The filing of a bankruptcy 

petition operates as an “automatic stay” that stops most lawsuits, 

foreclosures, and most other collection activities against the debtor. 

Under the Code, secured creditors—those with liens or other secured 

claims against the debtor’s property—are more likely to get some debt 

repaid than unsecured creditors. Creditors typically receive payment of 

their debts before shareholders receive any return of their equity in the 

failed company.

Business debtors that are eligible for protection under the Code may 

qualify for liquidation, governed primarily by Chapter 7 of the Code, or 

reorganization, governed by Chapter 11. Proceedings under both 

Chapters 7 and 11 can be voluntary (initiated by the debtor) or involuntary 

(generally initiated by at least three creditors).6

 

6

Voluntary cases are permitted under 11 U.S.C. § 301. Involuntary cases are permitted 

under 11 U.S.C. § 303.

Background 

Bankruptcy Proceedings
 

Page 4 GAO-12-735 Bankruptcy

• A liquidation proceeding—under Chapter 7—is a court-supervised 

procedure by which a trustee takes over the assets of the debtor’s 

estate, reduces them to cash, and makes distributions to creditors in 

accordance with the Code’s priority scheme.

• A reorganization proceeding—under Chapter 11—allows debtors that 

are commercial enterprises to continue to operate some or all of the 

debtor’s operations as a way to satisfy creditor claims. The debtor 

typically remains in control of its assets under a Chapter 11 

proceeding, and is called a debtor-in-possession (DIP). However, if 

the court determines that there is cause or it is in the best interest of 

creditors, the court can direct the U.S. Trustee to appoint a Chapter 

11 trustee to take over the affairs of the debtor. A debtor (or other 

interested party) may file a reorganization plan, which ultimately may 

be confirmed by the court. The plan includes details on the operations 

of the reorganization, including disposition or retention of property, 

mergers, and issuance of securities.7 The plan also divides creditors 

into classes and directs how the creditor classes will be paid. The 

debtor can terminate burdensome contracts and leases, recover 

assets, and rescale its operations to return to profitability. To continue 

operations, a debtor may obtain additional financing, which could be 

paid before other debts.8

The U.S. bankruptcy system involves multiple federal entities. While 

bankruptcy courts are located in 90 federal judicial districts, the Southern 

District of New York (which includes Manhattan) and the District of 

Delaware adjudicate a majority of larger corporate or business bankruptcy 

cases, many of which constitute “megacases.”

A debtor also may file a plan of liquidation 

under Chapter 11 or transfer to a Chapter 7 liquidation, which may 

provide a greater return to creditors.

9

 

7

See 11 U.S.C. § 1123.

The Judicial Conference 

of the United States recommends national policies and legislation for all 

aspects of federal judicial administration. AOUSC serves as the central 

administrative support entity for the Judicial Conference and the federal 

8

This is known as DIP financing and is available under 11 U.S.C. § 364.

9

AOUSC defines a “mega” Chapter 11 case as a single case or set of jointly administered 

or consolidated cases that involves $100 million or more in assets and 1,000 or more 

creditors. See GAO, Federal Bankruptcy Judges: Measuring Judges’ Case-Related 

Workload, GAO-09-808T (Washington, D.C.: June 16, 2009).
 

Page 5 GAO-12-735 Bankruptcy

courts, including bankruptcy courts. For example, AOUSC provides 

administrative, legal, financial, management, and information technology 

support functions for the federal courts. The Federal Judicial Center, an 

education and research agency for the federal courts, assists bankruptcy 

courts with education relating to case administration and management, 

while the majority of Federal Judicial Center research helps inform policy 

decisions of the Judicial Conference of the United States. In addition, the 

Trustee Program at Justice and the Bankruptcy Administrator Program 

oversee bankruptcy trustees and the administration of bankruptcy 

estates, respectively.10

It is important to note that certain financial institutions may not file as 

debtors under the Code and other entities face special restrictions in 

using the Code:

• Insured depository institutions: Under the Federal Deposit Insurance 

Act, FDIC serves as the conservator or receiver for the insured 

depository institutions placed into conservatorship or receivership 

under applicable law.11

• Insurance companies: Insurers generally are subject to oversight by 

state insurance commissioners, who have the authority to place them 

into conservatorship, rehabilitation, or receivership.

• Broker-dealers: Broker-dealers can be liquidated under the Securities 

Investor Protection Act (SIPA) or under a special provision of Chapter 

 

10The United States Trustee Program covers 84 of the 90 bankruptcy courts and consists 

of the Executive Office for U.S. Trustees which is led by a director; 21 regions managed 

by U.S. Trustees; and 95 field offices supervised by Assistant U.S. Trustees. The mission 

of the U.S. Trustee Program is to promote the integrity of the bankruptcy system. The U.S. 

Trustee Program oversees the administration of all bankruptcy cases filed by individual 

and business debtors in every federal judicial district except for Alabama and North 

Carolina. The U.S. Trustee’s specific duties in a case depend on the chapter under which 

a debtor files and the facts of the case. Bankruptcy Administrators, who are employees of 

the federal judiciary, perform the functions of the U.S. Trustees in the remaining six 

bankruptcy courts in Alabama and North Carolina. See 

http://www.justice.gov/ust/eo/ust_org/index.htm.

1112 U.S.C. § 1821(c).
 

Page 6 GAO-12-735 Bankruptcy

7 of the Code. However, broker-dealers may not file for reorganization 

under Chapter 11.12

• Commodity brokers: Commodity brokers, also known as futures 

commission merchants, are restricted to using only a special provision 

of Chapter 7 for bankruptcy relief.13

The OLA process could replace the bankruptcy process for certain 

financial companies. Title II of the Dodd-Frank Act established OLA, 

which requires a series of regulatory determinations and may involve 

limited judicial action (see fig. 1). On their own initiative, or at the request 

of the Secretary of the Treasury, regulators may consider whether to 

make a recommendation with respect to whether the Secretary should 

appoint FDIC as receiver for a financial company. Among other factors, 

regulators first must determine that the company generally falls under one 

of four categories:14

• bank holding companies (defined under the Bank Holding Company 

Act);15

 

12Chapter 7 of the Code contains special provisions for the liquidation of stockbrokers. 11 

U.S.C. §§ 741-753. Under SIPA, the SIPC initiates a liquidation proceeding, the primary 

purpose of which is to protect customers against financial losses arising from the 

insolvency of their brokers. Once a protective decree has been applied for under SIPA, 

any other pending bankruptcy proceeding involving the debtor stockbroker is stayed, and 

the court where the application is filed has exclusive jurisdiction over that stockbroker. 

SIPC participation can displace a Chapter 7 liquidation pending the SIPA liquidation, but 

provisions of the Code apply in a SIPA liquidation to the extent they are consistent with 

SIPA. See 15 U.S.C. §§ 78eee(b)(2)(B), 78fff(b). Because the stockbrokers discussed in 

this report are also dealers registered with the SEC as broker-dealers, we generally use 

the term broker-dealer rather than stockbroker in this report.

13Chapter 7 of the Code contains special provisions for commodity broker liquidation (11 

U.S.C. §§ 753, 761-767), and CFTC’s rules relating to bankruptcy are set forth at 17 

C.F.R. § 190.01 et seq. 

14Dodd-Frank Act § 201(a)(11); 12 U.S.C. § 5381(a)(11). The company must be 

incorporated or organized under federal or state law.

15Bank Holding Company Act of 1956, 12 U.S.C. § 1841 et seq. 

Orderly Liquidation 

Authority under the DoddFrank Act
 

Page 7 GAO-12-735 Bankruptcy

• nonbank financial companies supervised by the Federal Reserve;16

• any company that is predominantly engaged in activities that the 

Federal Reserve has determined to be financial in nature or incidental 

thereto for purposes of section 4(k) of the Bank Holding Company Act

(including broker-dealers that are registered with SEC and are 

members of SIPC); or

• any subsidiary of a company described in the bullets above that is 

predominantly engaged in activities that the Federal Reserve has 

determined to be financial in nature or incidental thereto for purposes 

of section 4(k) of the Bank Holding Company Act (except for insured 

depository institutions and insurance companies).17

In addition to the evaluation of whether the financial company fits within 

one of the categories described above, federal regulators recommending 

whether the Secretary of the Treasury should appoint FDIC as receiver 

must include:

• an evaluation of whether the financial company is in default or in 

danger of default;

 

16Under the Dodd-Frank Act, Title I, FSOC may require that a nonbank financial company 

become subject to Federal Reserve Board supervision. The Federal Reserve has issued a 

proposed rule on criteria for determining whether a company is predominantly engaged in 

financial activities for purposes of determining whether the company is a nonbank financial 

company under Title I of the Dodd-Frank Act. See appendix II for further details.

17Under the Dodd-Frank Act § 210(a)(1)(E), if FDIC is appointed receiver of a financial 

company, it has the authority to appoint itself as receiver of any subsidiary of the financial 

company if FDIC and the Secretary of the Treasury jointly determine that the subsidiary is 

in danger of default, such action would mitigate serious adverse effects on the financial 

stability or economic conditions in the United States, and such action would facilitate the 

orderly liquidation of the financial company. Although this authority does not apply to 

insurance companies or certain broker-dealers, special provisions may apply in those 

cases. For example, if the Secretary makes a determination with respect to an insurance 

company or if an insurance company is a subsidiary or affiliate of a financial company, the 

liquidation or rehabilitation of the insurance company is to be conducted under applicable 

state law. However, if the state regulator has not filed the appropriate judicial action within 

60 days after the date of the Secretary’s determination, then FDIC will have the authority 

to stand in place of the state regulator and file the appropriate judicial action to place the 

company into orderly liquidation under state law. Dodd-Frank Act § 203(e); 12 U.S.C. §

5383(e). 
 

Page 8 GAO-12-735 Bankruptcy

• a description of the effect that the default of the financial company 

would have on the financial stability in the United States;

• a description of the effect that the default of the financial company 

would have on economic conditions or financial stability for lowincome, minority, or underserved communities;

• a recommendation on the nature and extent of actions to be taken 

under Title II of the Dodd-Frank Act regarding the financial company;

• an evaluation of the likelihood of a private-sector alternative to prevent 

the default of the financial company;

• an evaluation of why a case under the Code is not appropriate for the 

financial company; and

• an evaluation of the effects on creditors, counterparties, and 

shareholders of the financial company and other market participants.

Upon recommendation, the Secretary of the Treasury, must invoke OLA if 

the 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 otherwise 

applicable federal or state law would have serious adverse effects on 

the financial stability of the United States;

• no viable private-sector alternative is available to prevent the default;

• the effect on the claims or interests of creditors, counterparties, and 

shareholders of the financial company and other market participants 

of proceedings under Title II of the Dodd-Frank Act is appropriate, 

given the impact that any action under Title II would have on the 

financial stability of the United States;

• an orderly liquidation would avoid or mitigate such adverse effects; 

and
 

Page 9 GAO-12-735 Bankruptcy

• the company meets the definition of financial company as described 

above.18

 

18Dodd-Frank Act § 203(b); 12 U.S.C. § 5383(b). The Secretary’s determination also must 

include whether a federal regulatory agency has ordered the financial company to convert 

all of its convertible debt instruments that are subject to the regulatory order.
 

Page 10 GAO-12-735 Bankruptcy

Figure 1: Decision Process for Invoking OLA and Appointing FDIC Receiver of a Failing Financial Company 

a

If the financial company or its largest U.S. subsidiary is: (1) a broker-dealer, SEC (two-thirds of the 

commissioners) must approve the recommendation in consultation with FDIC; (2) an insurance 

company, the Director of the Federal Insurance Office in Treasury also approves the recommendation 

in consultation with FDIC; or (3) any other financial company, FDIC (two-thirds of the Board of 

Directors) must approve the recommendation.
 

Page 11 GAO-12-735 Bankruptcy

By a two-thirds vote, the Federal Reserve and FDIC (or relevant 

regulator) must agree to make the recommendation to the Secretary of 

the Treasury to place the financial company into receivership.19 The 

Secretary consults with the President and then makes a determination to 

place the company in receivership, and notifies the company’s board of 

directors (or equivalent). If the company consents or acquiesces to the 

recommendation, FDIC becomes receiver. If the company does not 

consent, the Secretary through Justice must petition the D.C. District 

Court for an order authorizing the appointment of FDIC as receiver.20 The 

D.C. District Court has 24 hours to determine whether the Secretary’s 

determination was arbitrary and capricious, in which case FDIC would not 

become receiver.21 If the D.C. District Court failed to act within 24 hours, 

then FDIC would become receiver. The financial company can appeal the 

D.C. District Court’s determination, but the receivership would not be 

stayed (or postponed) if it did so. If the D.C. District Court did not uphold 

the Secretary’s determination, the Secretary could amend and refile or 

appeal within 30 days. Upon appointment as receiver, FDIC becomes 

successor to and legal custodian of the financial company, including 

assets and operations.22

Under authority provided by Title II of the Dodd-Frank Act, when FDIC is 

appointed receiver of the financial company it may take over and manage 

the assets of the company. FDIC must liquidate and wind up the affairs of 

 

19If the financial company or its largest U.S. subsidiary is a broker-dealer, then two-thirds 

of SEC Commissioners and two-thirds of the Federal Reserve Board approve the 

recommendation, in consultation with FDIC. If the financial company or its largest U.S. 

subsidiary is an insurance company, then the Director of the Federal Insurance Office in 

Treasury approves the recommendation along with the Federal Reserve. For all other 

types of companies, two-thirds of the Federal Reserve and two-thirds of the FDIC Board of 

Directors approve the recommendation in consultation with FDIC. Dodd-Frank Act § 

203(a); 12 U.S.C. § 5383(a). 

20Justice files the petition on behalf of Treasury. See generally 28 U.S.C. § 516.

21The D.C. District Court’s review is limited to the Secretary’s determination that the 

financial company is (1) in default or danger of default; and (2) satisfies the definition of a 

financial company.

22Title II also establishes additional authorities for FDIC as receiver, such as the ability to 

set up a bridge financial company, and collect funding for the OLA process from the 

financial industry after a company has gone through OLA. Dodd-Frank Act, § 210(o); 12 

U.S.C. § 5390(o). Under the Dodd-Frank Act, GAO must review and report on the 

Treasury Secretary’s decision to appoint FDIC as receiver. Dodd-Frank Act § 203(c)(5), 

12 U.S.C. § 5383(c)(5) discusses these responsibilities in more detail. 
 

Page 12 GAO-12-735 Bankruptcy

the financial company, and may sell or transfer the assets to a bridge 

financial company, which is a temporary company used to maintain the 

failed company’s operations. A bridge financial company may purchase 

assets, assume liabilities, and undertake other functions of the financial 

company. FDIC also has authority to determine the validity of creditor 

claims against the company and pay creditor claims. The Dodd-Frank Act 

generally requires that all creditors of a financial company with similar 

priority be treated similarly; however, in certain circumstances FDIC may 

treat similarly situated creditors differently. In some cases, FDIC may 

repudiate contracts to which a financial company is a party or may 

enforce certain contracts that otherwise could have been terminated 

because of the financial company’s insolvency.

Among its provisions, Title I of the Dodd-Frank Act requires certain 

financial companies to provide regulators with periodic reports on their 

plans for rapid and orderly resolution in the event of “material financial 

distress or failure” under the Code.23

• information on the manner and extent to which any insured depository 

institution affiliated with the company is adequately protected from 

risks arising from the activities of any nonbank subsidiaries of the 

company;

The resolution plan must include the 

following:

• full descriptions of the ownership structure, assets, liabilities, and 

contractual obligations of the company;

• identification of the cross-guarantees tied to different securities, 

identification of major counterparties, and a process for determining to 

whom the collateral of the company is pledged;24

 

23The Dodd-Frank Act, § 165(d)(1), states that the Federal Reserve and FDIC must 

review the resolution plans. Resolution plans are often referred to as living wills. The 

companies that must file reports are: (1) nonbank financial companies designated by 

FSOC for supervision by the Federal Reserve, (2) bank holding companies with $50 billion 

or more in consolidated assets, and (3) foreign banking organizations with $50 billion or 

more in total consolidated assets that are or are treated as bank holding companies. 12 

U.S.C. § 5365(d)(1). The resolution plans should not assume an orderly liquidation under 

Title II.

and

24Cross-guarantees are not specifically defined in the act but refer to contracts and other 

interconnections the financial company has with other parties.

Resolution Plans and 

Other Financial Stability 

Provisions under the 

Dodd-Frank Act
 

Page 13 GAO-12-735 Bankruptcy

• any other information that the Federal Reserve and FDIC jointly 

require by rule or order.25

The Federal Reserve and FDIC must review the information in these 

resolution plans. If they jointly determine and notify a company that its

plan is not credible or would not facilitate an orderly resolution under the 

Code, the financial company would have to submit a revised plan. A 

revised plan must discuss in detail revisions that address the deficiencies 

jointly identified by the Federal Reserve and FDIC. The revised plan must 

also address changes, if any, in its business operations or corporate 

structure that the company proposes to make to facilitate implementation 

of the plan. If the company fails to submit a satisfactory revised plan, the 

Federal Reserve and FDIC could impose stricter requirements such as 

higher capital or liquidity requirements on the company.26 If the company 

fails to submit a satisfactory revised plan within 2 years of the imposition 

of stricter requirements, the Federal Reserve and FDIC, in consultation 

with the Financial Stability Oversight Council (FSOC), may jointly direct a 

company to divest certain assets or operations jointly identified by the 

Federal Reserve and FDIC as necessary to facilitate an orderly resolution 

under the Code in the event of failure of the company.27

 

25Dodd-Frank Act § 165(d);12 U.S.C. § 5365(d).

26Id. at § 165(d)(5)(A); 12 U.S.C. § 5365(d)(5)(A).

27Id. at § 165(d)(5)(B); 12 U.S.C. § 5365(d)(5)(B). 
 

Page 14 GAO-12-735 Bankruptcy

The Dodd-Frank Act requires certain regulators to develop and issue 

rules to implement OLA and resolution plan requirements.28 For some 

rules, the regulators must consult with FSOC, a new entity established by 

the Dodd-Frank Act.29 FDIC—in consultation with FSOC—has primary 

responsibility for developing and issuing rules and regulations related to 

its authority as receiver of a failed financial company. Other sections of 

Title II of the Dodd-Frank Act also contain specific requirements for FDIC 

to coordinate with the Federal Reserve, SEC, and other banking 

regulators on key aspects of OLA. Under Title I, the Federal Reserve and 

FDIC must issue joint rules on resolution plans. FSOC has the authority 

to designate nonbank financial companies (including foreign nonbank 

financial companies) for Federal Reserve supervision if FSOC determines 

that such companies could pose a threat to the financial stability of the 

United States.30 These nonbank financial companies would have to file 

resolution plans.31 Appendix II lists the primary rules related to OLA and 

resolution plans and their status as of May 15, 2012.

 

28Regulatory agencies have authorizing statutes that set out their authority and 

responsibilities for developing and issuing regulations. An agency’s statute can prescribe 

formal rulemaking. The Administrative Procedure Act establishes procedures and broadly 

applicable federal requirements for informal rulemaking, also known as notice and 

comment rulemaking. This act generally requires agencies to publish a notice of proposed 

rulemaking in the Federal Register. After giving interested persons an opportunity to 

comment on the proposed rule, the agency may then publish the final rule. Agencies also 

may be subject to additional requirements imposed by other statutes specific to the 

agency.

29FSOC consists of 14 federal and state agency heads and an independent member with 

insurance expertise. The council was created to (1) identify risks to the financial stability of 

the United States that could arise from the material financial distress or failure, or ongoing 

activities, of large, interconnected bank holding companies or nonbank financial 

companies, or that could arise outside of the financial services marketplace; (2) promote

market discipline, by eliminating expectations on the part of shareholders, creditors, and 

counterparties of such companies that the U.S. government will shield them from such 

losses in the event of failure; and (3) respond to emerging threats to the stability of the 

U.S. financial system.

30Dodd-Frank Act § 113; 12 U.S.C. § 5323.

31Dodd-Frank Act § 165(d); 12 U.S.C. § 5365(d)(1).

Additional Rulemaking 

Authorities under the 

Dodd-Frank Act
 

Page 15 GAO-12-735 Bankruptcy

As we previously reported, the D.C. District Court issued Local Civil Rule 

85 on January 19, 2011, to implement its judicial review requirements 

under OLA. Generally, the rule reiterated the procedural requirements in 

the Dodd-Frank Act. It provided for a 24-hour review, and the financial 

company has the right to oppose the Secretary’s petition to invoke an 

FDIC receivership under OLA. If the court did not rule on the petition 

within 24 hours, or ruled in favor of the Secretary, the receivership would 

proceed immediately. As the rule was originally written, the Secretary of 

the Treasury would have had to notify the D.C. District Court under seal 

at least 48 hours before the filing of a petition, which would give the court 

time to prepare for the review. In addition, the original rule did not 

specifically address Rule 6 of the Federal Rules of Civil Procedure 

regarding the 24-hour period. Rule 6 states that if a time period ends on a 

weekend or holiday, the period would be extended to the next business 

day. Court officials told us that they included the original 48-hour notice 

because they were concerned about receiving advance notice before an 

OLA filing. Court officials also told us that the D.C. District Court was a 

smaller court that did not hear many business cases and few large 

bankruptcies and therefore they needed the advance notice.

In letters dated March 2011, FDIC and Treasury objected to notification 

requirements in the rule that required Treasury to provide an additional 

48-hour notification to the court before filing a petition to invoke OLA. In 

addition, they were concerned about the possible use of Rule 6 of the 

Federal Rules of Civil Procedure to extend the 24-hour period for the 

court to rule and the 48-hour notification period. The agencies said that 

Treasury may not always be able to provide the 48-hour notice because 

of the speed with which a financial company could become insolvent. 

FDIC and Treasury were concerned that the use of Rule 6 to calculate the 

timing of filings and decisions effectively would expand the court’s 24-

hour time frame to rule on the petition and the 48-hour notice period. For 

example, if the Secretary’s 48-hour notice period or the court’s 24-hour 

review period ended on a weekend or holiday, Rule 6 calculations would 

move the ends of those periods to the next business day. According to 

agency officials, this delay could have serious adverse effects on U.S 

financial stability. As a result, the agencies thought the court should be 

prepared to make rulings over the weekend.

On July 6, 2011, the court issued a revised final rule, which added “to the 

extent feasible” to the requirement that the Secretary of the Treasury 

notify the court 48 hours before filing a petition. In addition the revised 

rule added a section stating that the 48-hour notice period and the 24-

hour decision period were not subject to Rule 6, meaning that the time 

D.C. District Court 

Revised Its Rule for 

Judicial Review under 

OLA 
 

Page 16 GAO-12-735 Bankruptcy

limit would apply without regard to whether the time periods ended on a 

weekend or holiday. FDIC and Treasury officials told us that the revisions 

to the court’s rule addressed their concerns. The court has not yet tested 

the effectiveness of the rule because, as of May 1, 2012, the Secretary 

had not sought the appointment of FDIC as receiver in an OLA 

proceeding.

Federal regulators have issued separate final rules for OLA and 

resolution plans, as required by the Dodd-Frank Act. FDIC plans to issue 

additional rules to clarify its use of OLA, such as a joint rule with SEC for 

the resolution of broker-dealers. Because the first financial companies will 

not begin filing resolution plans until July 2012, it is too soon to determine 

the effectiveness of the plans. Despite the issuance of rules, academics 

and other experts have questioned FDIC’s ability to resolve large, 

systemically important financial institutions under OLA because of the 

complexity of the firms involved and challenges relating to international 

coordination. Regulators have reported progress on developing a 

universal identifier for financial companies that would help them identify 

and manage companies’ counterparty exposures.

Final Rules for OLA. On July 15, 2011, FDIC published a final rule 

(referred to as the Orderly Liquidation Authority Final Rule) under 

rulemaking authority provided by Section 209 of the Dodd-Frank Act. In 

its discussion of the final rule, FDIC noted that the rule represented the 

results of its initial phase of rulemaking for its OLA authority. FDIC staff 

also told us that this final rule included topics addressed in an earlier 

interim final rule and two notices of proposed rulemakings.32

More specifically, the final rule covers topics under three broad 

categories: (1) the definition of terms in a receivership under OLA and 

other general provisions of an FDIC receivership; (2) the priority of 

payments, including those for administrative expenses and to unsecured 

creditors; and (3) the process for administering claims against the failed 

financial company. The rule also covers other aspects of the receivership. 

For example, the final rule addresses FDIC’s ability to recover 

 

32FDIC published a notice of proposed rulemaking on October 19, 2010, an interim final 

rule on January 25, 2011, and a notice of proposed rulemaking on March 23, 2011. See 

appendix II for a complete list of rules and other actions. 

Although Regulators 

Have Issued Rules 

Related to OLA, Some 

Clarifications Remain 

Outstanding 

Federal Regulators Have 

Issued Final Rules for OLA 

and Resolution Plans
 

Page 17 GAO-12-735 Bankruptcy

compensation from a current or former senior executive who is found 

substantially responsible for the failure of the financial company. In 

addition, the rule addresses the payment for services performed under 

personal service agreements after FDIC is appointed receiver or for the 

acceptance of services by a bridge financial company. FDIC’s final rule 

also discusses the distribution of assets in the liquidation of a 

noninsurance company subsidiary of an insurance company. FDIC has 

indicated that it believes it now has in place the regulations necessary to 

accomplish a resolution under OLA, even though it intends to adopt 

several additional regulations over the next year.

In addition, FDIC published a final rule (the Mutual Insurance Holding 

Company Treated as Insurance Company Rule) concerning the treatment 

of mutual insurance holding companies on April 30, 2012. Mutual 

insurance holding companies are owned by policyholders, not 

stockholders, and generally have been subject to state insurance 

insolvency regimes. In its final rule, FDIC sought to make the resolution of 

mutual insurance companies conform to state insurance statutes for the 

resolution of such companies.

Proposed Rules Related to OLA. FDIC, in consultation with FSOC, also 

has issued two proposed rules related to OLA to clarify certain technical 

issues. First, FDIC and Treasury jointly issued a notice of proposed 

rulemaking on November 25, 2011, governing the calculation of the 

maximum obligation FDIC could incur as receiver under OLA, as required 

by the Dodd-Frank Act.33 The proposed rule (the Maximum Obligation 

Limitation Rule) outlines a calculation that limits the total outstanding 

obligations that FDIC can incur in connection with the liquidation of a 

financial company under OLA and defines terms such as “obligations.”34

 

33The Dodd-Frank Act expressly prohibits “bailouts” to a specific firm. Under OLA, FDIC 

must maximize the value of the assets of the financial company under receivership in the 

context of liquidation. However, the Dodd-Frank Act allows FDIC as receiver of a failed 

company to borrow funds from Treasury to carry out the orderly liquidation. 

FDIC issued a second proposed rule on March 20, 2012, which relates to 

its enforcement of subsidiary and affiliate contracts as the receiver of a 

covered financial company. The proposed rule (Enforcement of 

Subsidiary and Affiliate Contracts by the FDIC as Receiver of a Covered 

34FDIC’s Board of Directors approved a final Maximum Obligation Limitation Rule on April 

23, 2012. After we completed our analysis, Treasury approved the final rule in June 2012 

and the rule was published in the Federal Register on June 22, 2012. 
 

Page 18 GAO-12-735 Bankruptcy

Financial Company Proposed Rule) clarifies FDIC’s authority to preserve 

the value of a failed financial company’s assets and business lines by 

enforcing certain contracts of subsidiaries and affiliates of the financial 

company. FDIC as receiver has authority to enforce contracts guaranteed 

by the financial company even though the counterparty has the 

contractual right to terminate or accelerate the contract based on the 

insolvency of the financial company. FDIC must transfer the guarantee 

and all related assets to a bridge financial company or third party or 

provide adequate protection for the obligations. According to FDIC, this 

authority will help enable it to place a financial company at the holding 

company level into receivership without placing solvent subsidiaries into 

receivership, while also helping to mitigate systemic risk and maintain 

financial stability.

Final Rule on Resolution Plans. On November 1, 2011, FDIC and the 

Federal Reserve published a final rule (the Resolution Plans Final Rule) 

implementing the Dodd-Frank Act requirement under section 165(d). 

Under this requirement, bank holding companies with at least $50 billion 

in total consolidated assets (including foreign banking organizations that 

are treated as bank holding companies) and nonbank financial companies 

supervised by the Federal Reserve must periodically submit resolution 

plans.35 Although this rule requires these types of financial institutions to 

submit plans describing how they would be resolved through the 

bankruptcy process, regulators reported that having companies file 

resolution plans would help FDIC in planning for the exercise of the 

possible use of its resolution authorities, including OLA. Regulators 

anticipate the plans also would provide additional insights on these 

companies’ structure and complexity, including funding sources and 

counterparties. In addition, the Federal Reserve noted that the plans will 

assist in its supervisory efforts to ensure that companies operate in a 

manner that is both safe and sound and do not pose risks to financial 

stability generally. The final rule addresses information required in the 

plans, steps for submitting the plans, requirements for updating plans, 

and steps regulators may take for addressing inadequate plans.36

 

35FDIC also has issued a rule requiring resolution plans for depository institutions with 

total assets of $50 billion or more. These rules were promulgated under the Federal 

Deposit Insurance Act.

Under 

36Federal Reserve staff also made some technical changes in the final rule to clarify how 

companies with large depository institution subsidiaries should prepare plans when their 

largest asset would be resolved outside of the bankruptcy process. 
 

Page 19 GAO-12-735 Bankruptcy

the rule, a company’s resolution plan must take into account different 

economic scenarios provided to the company by the Federal Reserve; the 

scenarios will be developed in the Federal Reserve’s rules on stress 

testing. As shown in table 1, the deadlines for resolution plans are 

staggered by company size. Plans for the largest bank holding companies 

are due in July 2012.

Table 1: Deadlines for Submissions of Initial Resolution Plans, by Size of Financial 

Company 

Size of bank holding company 

or nonbank financial company

(dollars in assets)

Deadline for first 

resolution plan a

Large (greater than $250 billion) July 1, 2012 

Medium ($100-$250 billion) July 1, 2013

Small (less than $100 billion) December 31, 2013

Sources: Federal Reserve and FDIC.

a

The rule determines a U.S. company’s size by reviewing total nonbank assets as reported to the 

Federal Reserve (or for foreign-based companies, total U.S. nonbank assets).

FDIC and other regulators noted in our discussions that although they 

completed a final rule for OLA and drafted several other rules, regulators 

are working on, but have not yet issued, certain mandated rules. In 

addition, the final rule does not address a number of important issues. 

Most of the outstanding rules related to OLA are required under the 

Dodd-Frank Act. Three of these are rules FDIC must issue jointly with 

other regulators:

• Orderly liquidation of broker-dealers (no statutory deadline);

Regulators Plan to Issue 

Additional Rules to Clarify 

OLA
 

Page 20 GAO-12-735 Bankruptcy

• Recordkeeping for qualified financial contracts (due July 21, 2012);37

• Source of strength (due July 21, 2012).

and

38

FDIC officials reported that each of these three rules was in a different 

stage of development, with the recordkeeping rule for qualified financial 

contracts closest to being issued, potentially as an interim rule before the 

statutory deadline in July.

Besides addressing the complexity of OLA, regulators told us that 

coordination and reaching consensus with different regulators 

represented a challenge in drafting and issuing OLA-related rules, 

particularly given the number of rulemakings required of some regulators 

and resource constraints. As part of the OLA rule development process, 

FDIC must consult with different members of FSOC and in some cases is 

statutorily mandated to work with specific regulators or agencies.39

For example, under the Dodd-Frank Act, FDIC and SEC must, after 

consultation with SIPC, develop a rule for the orderly liquidation of brokerRegulators also have had to address how certain rules would avoid 

conflicts with other rules and help ensure consistency with other 

requirements mandated under the Dodd-Frank Act.

 

37Qualified financial contracts are financial agreements including securities and 

commodities contracts, forward contracts, and repurchase and swap agreements. Certain 

counterparties to these agreements are exempt from the automatic stay under the Code 

and other bankruptcy provisions. The automatic stay is designed to prevent creditors from 

taking action against or collecting assets from the debtor before approval from the 

bankruptcy court, but the exemption allows the counterparty to the qualified financial 

contract to close out the contract when the debtor files for bankruptcy and seize collateral 

if the company has an obligation to the counterparty. Under OLA, qualified financial 

contracts are subject to a 1-day stay and counterparties cannot terminate their contracts 

until 5:00 p.m. of the day after FDIC begins its receivership. During this time, FDIC may 

have transferred the contract to a bridge financial company or repudiated (rejected) it. 

38Dodd-Frank Act § 616(d); 12 U.S.C. § 1831o-1.

39Agency officials told us that potential rules are discussed among FSOC members 

through the Orderly Liquidation Authority, Resolution Plans Committee. FDIC staff told us 

that there are protocols under which draft rules are provided to FSOC members and the 

committee. FSOC members can put forth suggestions for rules. For example, FDIC and 

Treasury obtained feedback on the draft Maximum Obligation Limitation proposed rule 

through this process.

Joint Rule Development
 

Page 21 GAO-12-735 Bankruptcy

dealers that are subject to OLA.

40 Under OLA, FDIC, as receiver of a 

failed broker-dealer, or in a case in which the largest U.S. subsidiary of a 

financial company is a broker-dealer, would appoint SIPC as trustee for 

the liquidation. However, in our earlier discussions with FDIC, SEC, and 

SIPC officials, they noted that the Dodd-Frank Act did not clearly 

delineate SIPC’s role in a broker-dealer resolution under OLA, which may 

pose challenges in such a case. For instance, if FDIC as the receiver of a 

broker-dealer put the broker-dealer into a bridge institution, the agencies 

would need to determine what SIPC’s role would be and how creditor and 

customer claims would be handled.41

SEC officials told us that other Dodd-Frank requirements were a 

complicating factor in the development of the required rule on 

recordkeeping for qualified financial contracts. Under FDIC’s proposal, 

financial companies would have to provide FDIC with information on 

swaps and other contracts similar to the information that they would 

provide regulators under other Dodd-Frank requirements.

FDIC officials told us that this rule

would govern the relationship between FDIC and SIPC. Although there is 

no statutory deadline for this rule, SIPC officials emphasized the 

importance of the rule to clarify SIPC’s participation so as to avoid 

confusion in any future resolution under OLA. FDIC and SIPC officials 

told us that they met together with SEC for the first time on May 3, 2012, 

to discuss developing this rule. FDIC officials reported that they anticipate 

issuing a final rule by the end of 2012.

42

 

40Dodd-Frank Act § 205(h).

FDIC officials 

told us that they are actively working with other regulators on the rule, 

which is due in July 2012. In another example, Federal Reserve staff told 

us that rulemaking related to the source of strength rule involved 

significant policy decisions, including to which bank holding companies 

the rule would apply, and how this requirement relates to other 

41SIPC uses its fund, established by SIPA, to make advances to satisfy customer claims 

for missing cash and securities, including notes, stocks, bonds, and certificates of deposit. 

The fund is financed through annual assessments of SIPC member firms. 15 U.S.C. § 

78aaa et seq. 

42Swaps are contracts in which two parties agree to exchange periodic interest payments, 

especially when one payment is at a fixed rate and the other varies according to the 

performance of a reference rate, such as the prime rate.
 

Page 22 GAO-12-735 Bankruptcy

requirements for bank holding companies.43

FDIC officials told us that other OLA-related rules—either mandated by 

the Dodd-Frank Act or recommended by others—detailing key aspects of 

FDIC’s authority as receiver, as well as the treatment of creditors, were 

still in the design phase or had not been drafted. First, the final rule on 

FDIC’s general authority under OLA does not fully define the universe of 

financial companies for which FDIC could be receiver.

FDIC officials told us that 

they have reached out to the Federal Reserve and Office of the 

Comptroller of the Currency to start developing this rule (also due in July 

2012) but do not have an estimated issuance date.

44 In an earlier 

proposed rule, FDIC included a definition of financial companies (under 

its authority under Title II of the Dodd-Frank Act) but in the final rule, the 

agency deferred finalizing this definition until the Federal Reserve issued 

its final rule on the definition of nonbank financial companies (under its 

authority for enhanced supervision under Title I of the Dodd-Frank Act). 

The Federal Reserve has issued two proposed rules on the definition of 

financial companies and officials from FDIC and the Federal Reserve told 

us that they have been coordinating to make their definitions consistent.45

Second, the final rule on FDIC’s general authority also has not defined 

how creditors under an OLA proceeding would receive no less than they 

would under a Chapter 7 bankruptcy proceeding, as mandated under the 

Dodd-Frank Act. In using this authority, FDIC would have to quickly 

assess the valuation of the company under Chapter 7. In comments on 

FDIC officials told us that they anticipated issuing a final rule defining 

financial companies by the end of 2012.

 

43The Dodd-Frank Act § 616(d) amended the Federal Deposit Insurance Act to require 

any company that controls an insured depository institution to serve as a source of 

financial strength for that insured depository institution. This provision applies to bank 

holding companies, savings and loan holding companies, and any other company that 

controls an insured depository institution. Section 616(d) provides that “source of financial 

strength” means the ability of the company to provide financial assistance to the 

subsidiary insured depository institution in the event of its financial distress. 12 U.S.C. § 

1831o-1. 

44As discussed earlier, FDIC’s authority under OLA would extend to those companies 

“predominantly engaged in activities that the Federal Reserve has determined are 

financial in nature or incidental thereto for purposes of section 4(k) of the Bank Holding 

Company Act.” The final OLA rule did not define how FDIC would make this 

determination.

45See appendix II for a complete list of the proposed rules and their timelines.

Development of other OLARelated Rules 
 

Page 23 GAO-12-735 Bankruptcy

the proposed rule, industry groups and a federal regulator called for 

greater clarification about how FDIC would do its assessment.46

Third, FDIC plans to clarify through rulemaking how it would establish and 

maintain a bridge financial company. FDIC, as receiver of a failed 

financial company, may organize a bridge financial company to merge the 

failed financial company with another company, or to transfer any assets 

and liabilities of the failed company to the bridge financial company, 

without obtaining approval or consent from creditors. In the OLA final rule, 

FDIC also recognized that the treatment of assets and liabilities 

transferred to a bridge financial company needed additional clarification. 

FDIC officials told us that they expected to issue a rule by the end of 2012 

clarifying the use of bridge financial companies. In January 2012, FDIC 

discussed the role of the bridge financial company and said in its view, a 

bridge entity would help preserve continuity of operations for the failed 

financial company and would provide time for FDIC to develop resolution 

options, including merger with another company, conversion into a 

recapitalized company, a stock sale, or a purchase and assumption 

transaction, much as the agency does when it sells failed banks to 

another institution. More recently, FDIC’s Acting Chair discussed the use 

of a bridge financial company as part of FDIC’s resolution strategy.

FDIC 

officials told us that they have started to develop a “minimum recovery” 

rule to respond to these concerns and clarify how creditors would receive 

no less than they would under a Chapter 7 bankruptcy proceeding.

47

 

46Although the Dodd-Frank Act does not provide authority for FDIC to treat a portion of 

secured creditors’ claims as unsecured (or take a “haircut” on recoveries), FSOC in its 

study of this topic did not find that haircuts were needed to promote market discipline or 

protect taxpayers. See Report to the Congress on Secured Creditor Haircuts (Washington, 

DC: July 18, 2011).

Under this strategy, FDIC, as receiver, initially would own the bridge 

financial company. As owner, FDIC would (1) create a capital base by 

effectively converting some of the debt from the former parent company 

into equity in the new bridge company, (2) obtain any necessary liquidity 

from the Orderly Liquidation Fund in Treasury, and (3) appoint a new 

board of directors and chief executive officer from the private sector. The 

47Martin J Gruenberg. “Remarks to the Federal Reserve Bank of Chicago Bank Structure 

Conference” (Chicago, Ill.: May 10, 2012).
 

Page 24 GAO-12-735 Bankruptcy

Dodd-Frank Act allows for a bridge financial company to be established 

for 2 years, with the ability to extend it for 1 year (up to three times).48

Furthermore, FDIC must issue rules related to its ability to impose 

assessments on financial companies to pay for any losses or obligations 

incurred while taking a failed company into receivership. Under the DoddFrank Act, FDIC first must use the proceeds from the sale of assets from 

the failed company to cover any losses. However, FDIC may borrow 

Treasury funds to finance operations with the requirement that FDIC later 

assess financial companies covered under OLA to pay for any losses not 

covered by asset sales.49 (The Maximum Obligation Limitation Rule 

discussed earlier determines the maximum amount that FDIC can borrow 

from Treasury.) FDIC, in consultation with Treasury, must develop rules 

to clarify its authority to impose assessments. FDIC also must establish a 

risk matrix for imposing assessments after taking into account 

recommendations from FSOC.50

The Dodd-Frank Act also requires FDIC to issue rules about records 

retention for a financial company under OLA and purchaser eligibility 

However, FDIC and Treasury officials 

told us that FDIC had not started drafting this rule and there is no 

statutory deadline to do so.

 

48The same limitation applies to bridge banks under receivership of FDIC under the 

Federal Deposit Insurance Act. 12 U.S.C. § 1821(n)(9). Under the Dodd-Frank Act, FDIC’s 

receivership appointment has a limit of 3 years with two possible 1-year extensions. DoddFrank Act § 202(d); 12 U.S.C. § 5383(d). 

49The Dodd-Frank Act specifically states OLA is not a bailout to individual firms. Section 

214 provides that all financial companies put into OLA must be liquidated and all funds 

expended in the liquidation shall be recovered through disposition of assets or 

assessments on the financial sector. 12 U.S.C. § 5394, Section 1101 amended the 

section 13(3) of the Federal Reserve Act to prohibit the Federal Reserve Board from 

authorizing direct loans for the purpose of assisting a single and specific company to avoid 

bankruptcy, as it did in the 2008 financial crisis. 12 U.S.C. § 343.

50FDIC would first assess creditors in the liquidation that received additional payments as 

defined in the Dodd-Frank Act. If assessments imposed on claimants are insufficient, 

FDIC may assess any bank holding company with total consolidated assets of at least $50 

billion, any nonbank financial company supervised by the Federal Reserve Board, and 

other financial companies with total consolidated assets of at least $50 billion. The 

universe of companies that may be required to pay for an assessment also depends on 

the definition of financial company, which has not yet been finalized. Dodd-Frank Act § 

210(o)(1)(D), 12 U.S.C. § 5390(o)(1)(D).
 

Page 25 GAO-12-735 Bankruptcy

under OLA.51 FDIC faces no statutory deadline for completing these rules, 

and FDIC officials told us that they considered them to be of lower 

priority. Lastly, FDIC may issue additional rulemakings through its general 

authority under Title II of the Dodd-Frank Act, in consultation with 

FSOC.52 FDIC plans to issue a rule about the orderly liquidation of a 

commodity broker, but officials told us that they would coordinate any 

rulemaking with changes CFTC might make to its rule related to 

commodity broker bankruptcies.53

Although FDIC and other regulatory officials noted that resolution plans 

could help prepare for the possible failure of a large financial company, 

not enough time has passed to determine the effectiveness of the living 

will requirement in assisting financial companies to prepare for 

bankruptcy (as discussed earlier) as well as aiding FDIC in the use of its 

Title II authority. As mentioned previously, the largest bank holding 

companies are required to submit resolution plans by July 1, 2012. As of 

May 2012, FSOC had not yet designated the systemically important 

nonbank financial companies, and the resolution plan final rule states that 

these companies do not have to file earlier than 270 days from their date

of designation.54 Federal Reserve and FDIC staff told us that they 

anticipated that 9 or 10 bank holding companies would file in the first 

wave of submissions. Federal Reserve officials told us that they have 

been in discussions with the largest bank holding companies since the 

rule was finalized.55

 

51For regulations regarding records retention, see § 210(a)(16)(D), and for purchaser 

eligibility, see §210(r). FDIC may issue rules on termination of a receivership; see DoddFrank Act § 202(d)(5). 

Although entities commenting on the draft rule for 

resolution plan requirements brought up concerns about the definition of 

government support to financial companies and the confidentiality of 

52Dodd-Frank Act § 209; 12 U.S.C. § 5389. FDIC has developed the Office of Complex 

Financial Institutions for carrying out its Title II responsibilities and has begun to track 

potential circumstances under which OLA would be warranted.

5317 C.F.R. § 190.01 et seq.

54Financial Stability Oversight Council, Authority to Require Supervision and Regulation of 

Certain Nonbank Financial Companies, 77 Fed. Reg. 21637 (April 11, 2012),12 C.F.R. §§ 

243.3(a)(2), 381.3(a)(2).

55The resolution plans rule was published in November 2011. See appendix II for further 

details. 

Concerns Have Been 

Raised about FDIC’s 

Limited Experience with 

Resolving Large, Complex 

Institutions 
 

Page 26 GAO-12-735 Bankruptcy

proprietary data, regulatory officials believe that they have largely 

addressed these issues in the final rule. As of May 2012, details on the 

credit exposure reporting requirements had not been specified. Federal 

Reserve officials told us that the requirement for credit exposure reports 

will be included in a separate rulemaking related to single-party credit 

exposure limitation.56

In the bankruptcy process, the resolution or liquidation of large, complex, 

internationally active financial firms involves multiple challenges. As we 

discussed in our 2011 report, these challenges include identifying funding 

sources and counterparties and dealing with complex corporate 

structures across international jurisdictions.57

Furthermore, although FDIC has been working to further clarify its 

authority under OLA, several academic and other experts have raised 

concerns about FDIC’s overall ability to effectively initiate the resolution of 

Financial and legal experts 

have noted that resolution plans might not be as helpful as hoped during 

times of financial distress because of the need for current information—

much of a company’s contracts, assets, and liabilities could change 

dramatically from day to day. The final rule for resolution plans under Title 

I requires financial companies to stress test their portfolios under multiple 

scenarios to identify the financial firm’s risks. However, the scenarios may 

not anticipate the type of financial crisis that could eventually lead to a 

firm’s insolvency. Because of these challenges and the reported burden 

associated with developing the plans, some industry and academic 

experts have questioned the merits of the plans. FDIC noted their 

expectation that the plans, when complete, would provide important 

information for its advance planning to facilitate any necessary liquidation 

of a firm, irrespective of the cause of the firm’s failure.

 

56Under the Dodd-Frank Act, the Federal Reserve must issue regulations that prohibit 

each nonbank financial company supervised by the Federal Reserve and bank holding 

company with at least $50 billion in assets from having credit exposure to any unaffiliated 

company that exceeds 25 percent of the capital stock and surplus. Dodd-Frank Act § 

165(e)(1); 12 U.S.C. § 5365(e)(1). The Dodd-Frank Act also requires that the Federal 

Reserve require supervised nonbank financial companies and bank holding companies to 

file credit exposure reports that generally would include (1) the nature and extent to which 

the company has credit exposure to other significant nonbank financial companies and 

significant bank holding companies, and (2) the nature and extent to which other 

significant nonbank financial companies and significant bank holding companies have 

credit exposure to that company. Dodd-Frank Act § 165(d)(2); 12 U.S.C. § 5365(d)(2). 

57See GAO-11-707. 
 

Page 27 GAO-12-735 Bankruptcy

large and complex firms without causing broader market disruption. As 

we discussed in our 2011 report, FDIC has issued an analysis of how it 

would have handled the failure of Lehman under OLA; some criticized the 

analysis for its assumptions about Barclays Capital Inc.(Barclays)’s ability 

to obtain regulatory approval to purchase Lehman’s distressed assets at 

a time of widespread weakness in the financial markets.58 According to 

Lehman’s bankruptcy examiner, Barclays was interested in acquiring 

Lehman prior to Lehman’s bankruptcy and did purchase certain assets of 

Lehman’s following bankruptcy. According to FDIC, its willingness to 

absorb the first $40 billion in Lehman’s losses would have addressed 

concerns of Barclays’ U.K. regulators. FDIC officials told us that they 

have been given sufficient powers to resolve such firms in order to limit 

further market disruption. FDIC officials reported that having access to 

funding would allow the receiver to make payments to creditors shortly 

after the time of failure and would help to maintain financial stability. In 

addition, they noted that the receiver would be able to establish a bridge 

financial company, as discussed earlier, to maintain the operations of the 

company without engaging in a bailout of stockholders of the failed firm.

FDIC reported it received strong support for its proposals under OLA 

during a public forum with academic experts in January 2012.59

Others have noted FDIC’s lack of experience in resolving financial 

companies as complex as Lehman with multiple international 

subsidiaries. As one SIPC official told us, Lehman collapsed within 24 

hours—a much shorter planning period than that to which FDIC is 

accustomed when resolving failed banks. In response, FDIC officials 

noted that they likely would have reviewed a firm’s resolution plan and 

been kept abreast of actions taken by the firm’s supervisor. As FDIC 

notes in its paper on the hypothetical liquidation of Lehman under OLA, 

FDIC would have been engaged for months prior to the failure of the firm.

In addition, we noted in our 2011 report, there have been few large scale 

bankruptcies of complex, internationally active financial firms.

However, others have noted that today’s largest financial companies have 

structures and asset sizes that dwarf those of Lehman, which remains the 

largest Chapter 11 debtor in U.S. history. FDIC also could be limited in its 

 

58See GAO-11-707 and FDIC, “The Orderly Liquidation of Lehman Brothers Holdings Inc. 

under the Dodd-Frank Act,” FDIC Quarterly, vol. 5, no. 2 (May 2011). 

59FDIC Systemic Resolution Advisory Committee meeting, January 2012.
 

Page 28 GAO-12-735 Bankruptcy

ability to manage the failure of an internationally active financial institution

because it would be responsible for resolving the domestic subsidiaries of 

a failed company. Certain subsidiaries, assets, and creditors would be 

subject to separate insolvency regimes in various countries.60

As discussed in our 2011 report, cross-border resolutions of 

internationally active financial institutions such as Lehman Brothers 

remain a challenge, due to the manner in which different countries’ 

insolvency proceedings interact. In comments on the proposed resolution 

plan rules, several entities called for international coordination on the 

submission and approval of resolution plan requirements, as many 

internationally active financial institutions will be subject to resolution 

regimes in multiple countries. U.S. and international regulators have 

recognized this challenge and in July 2011 the Financial Stability Board 

issued a consultative document that proposed a requirement to mandate 

that all designated global systemically important financial institutions 

(SIFI) have recovery and resolution plans.61

 

60FDIC could maintain certain subsidiaries, assets, and relationships with certain creditors 

in other countries in order to avoid insolvency regimes in those countries and maintain the 

value of the failed U.S. company. As we discuss later in this report, international 

insolvency regimes have created challenges for those resolving Lehman and MF Global.

In addition, the document 

called for cross-border cooperation agreements to enable countries’ 

resolution authorities to act collectively to resolve internationally active 

financial institutions in an orderly and less-costly way.

61The Financial Stability Board brings together central bank officials, finance and treasury 

officials, and financial institution regulators as well as representatives from the 

International Monetary Fund and the World Bank to address issues related to global 

financial stability. In November 2011, the Financial Stability Board defined SIFIs as 

“financial institutions whose distress or disorderly failure, because of their size, complexity 

and systemic interconnectedness, would cause significant disruption to the wider financial 

system and economic activity.” The Financial Stability Board identified 29 companies as 

global SIFIs in the November 2011 statement and plans to update the list each year.

International Coordination 

Remains a Key Challenge, 

Although Regulators Have 

Made Progress on a 

Universal Identifier

International Coordination 

Efforts
 

Page 29 GAO-12-735 Bankruptcy

After receiving comments on its proposal, the Financial Stability Board 

released an updated list of key attributes of effective regimes for resolving 

failed SIFIs in October 2011.62 These attributes addressed issues such as 

the scope and independence of the country’s resolution authority, the 

essential powers and authorities of the resolution authority, and how 

jurisdictions can facilitate cross-border cooperation in resolutions of SIFIs. 

Members of the G20 endorsed the attributes in November 2011.63

FDIC, the Federal Reserve, and other international regulators that are 

members of the Financial Stability Board have formed “crisis 

management groups” to review the recovery and resolution plans for 

global SIFIs. Officials from both U.S. agencies told us that the crisismanagement groups for five of the U.S. global SIFIs have met with their 

international regulatory counterparts during the past year. In particular, 

they discussed progress for the planning efforts of these institutions. 

FDIC also has reported starting bilateral discussions with the foreign 

regulators of U.S.-based global SIFIs to identify any impediments to 

orderly resolution and implement any changes to address those 

challenges. FDIC noted that these discussions have led to the drafting of 

several memorandums of understanding with international regulators. 

FDIC further reported in January 2012 that their analysis has shown that 

in a crisis the U.S.-based global SIFIs would have a limited number of 

international regulators with which to work. For these financial institutions, 

more than 90 percent of the “total reported foreign activity” was located in 

FDIC 

and Federal Reserve officials report that the Dodd-Frank Act’s Title II 

authority for FDIC to resolve systemically important financial institutions 

and its Title I requirement for these institutions to file periodic resolution 

plans follow the key attributes designated by the Financial Stability Board. 

Federal Reserve staff told us that the United States was ahead of some 

jurisdictions in adopting these provisions. In a November 2011 update 

(the latest available), the Financial Stability Board wrote that many 

jurisdictions had not implemented adequate legal frameworks for 

resolving global SIFIs and substantial further work on recovery and 

resolution plans as well as cross-border cooperation was needed.

 

62Financial Stability Board, “Key Attributes of Effective Resolution Regimes for Financial 

Institutions” (October 2011).

63The G20 or Group of Twenty includes representatives of nations with major economies. 

During its summits, heads of state, financial ministers, and heads of central banks consult 

and coordinate on issues related to the international financial system.
 

Page 30 GAO-12-735 Bankruptcy

from one to three foreign jurisdictions and more than 80 percent of this 

activity came from legal entities in the United Kingdom.

However, Federal Reserve staff told us developing plans for cross-border 

resolution under the Bankruptcy Code remains a challenge. While the 

United States is requiring companies to file resolution plans that must 

detail how companies would resolve themselves under the Code, in some 

countries, regulators complete a resolution plan that discusses resolving 

the company without further market disruptions. In contrast, financial 

companies in those countries only have to complete a recovery plan that 

discusses ways to restore strength to a company under financial stress. 

Therefore, foreign banking organizations, which must file resolution plans 

in the United States, could face a different set of requirements in their 

home countries.

U.S. and international regulators have cited the development of the Legal 

Entity Identifier (LEI) as a code for financial institutions and regulators to 

better identify and manage institutions’ relationships with other 

institutions—allowing them to more effectively measure and monitor 

systemic risk. In addition, FDIC officials told us that the use of an LEI 

should help regulators in resolving a financial company during the OLA 

process because its adoption would allow large, systemically important 

financial companies to identify their many component entities, which 

generally are organized along business rather than legal lines. As we 

discussed in our 2011 report, the resolution of these companies involves 

unwinding the complex interrelationships among the entities in order to 

address creditor claims.64

Currently, a single financial institution may be identified or coded in 

different ways by a firm doing business with that institution. For example, 

JP Morgan Chase, Inc. may be referred to as JPMC, Chase, and 

JPMorgan. Regulators have cited a universal identifier for financial 

institutions as particularly helpful in the identification of parties in 

transactions involving over-the-counter derivatives.65

 

64See 

When Lehman 

collapsed in 2008, other financial institutions struggled to determine their 

counterparty exposure to the firm, causing further market disruptions.

GAO-11-707. 

65Over-the-counter derivatives refer to derivatives not traded on a formal exchange.

Development of Global Legal 

Entity Identifier
 

Page 31 GAO-12-735 Bankruptcy

The financial industry has been exploring a universal identifier for 

decades, but recently regulators have pushed for a global mandate. The 

Dodd-Frank-created Office of Financial Research issued a policy 

statement in 2010 seeking comment on the development of an LEI.66

Global acceptance of an LEI requires determining its governance and 

regulatory oversight. An Office of Financial Research official told us that 

the Financial Stability Board’s LEI Expert Group has broken into 

committees to discuss issues including governance, operating model, 

reference data and confidentiality, funding, and implementation. The 

official said that the governance committee also has been considering a 

model in which a nonprofit entity would administer the process. According 

to Treasury, the Financial Stability Board published a report in mid-June 

2012 including recommendations for the appropriate governance 

framework for a global LEI. U.S. regulators reported that the first iteration 

of LEI structure will be limited to the code itself and a minimal set of 

reference data, not information about ownership hierarchies, because of 

confidentiality concerns. In its commodity swap reporting rule (which goes 

into effect July 16, 2012), CFTC became the first U.S. regulator to require 

financial companies to use LEIs.

Since then, the Office of Financial Research and the Financial Stability 

Board have held roundtables and the financial industry has convened 

panels on the development of an LEI. In January 2012, the Financial 

Stability Board convened an expert group of regulators (supported by an 

industry advisory panel of experts) to provide recommendations on the 

governance framework for the LEI with a goal of endorsement by the G20 

summit in June 2012. On May 30, the Financial Stability Board endorsed 

the expert group’s recommendations for a governance and operational 

framework for an LEI. In addition, the Financial Stability Board’s 

specification for an LEI standard is derived from the technical standard for 

a 20-digit alphanumeric code published in May 2012 by the International 

Organization for Standardization. 

67

 

66The Office of Financial Research supports the Financial Stability Oversight Council and 

member agencies by collecting and standardizing financial data, performing applied and 

essential long-term research, developing tools for risk measurement and monitoring, 

performing other related services, and making the results of the activities of the office 

available to financial regulatory agencies. The office operates as part of Treasury.

SEC also has published a proposed 

securities swap reporting rule that requires the use of an LEI provided by 

67CFTC has clarified its rule that financial institutions may use an interim identifier if the 

LEI was not adopted by July 16, 2012. See 77 Fed. Reg. 2136 (Jan. 13, 2012).
 

Page 32 GAO-12-735 Bankruptcy

an international organization when available.

68 The Financial Stability 

Board has recommended a target for global implementation of the LEI 

standard by March 2013.

In the 2011 report, we found that comprehensive data on the number of 

financial companies in bankruptcy are not readily available. Bankruptcy 

data are collected for provisions relevant to the Code and for 

management of cases. While federal agencies currently do not collect 

information to identify certain bankrupt entities, the Federal Judicial 

Center is starting to assemble a specialized database of financial

company bankruptcies from the past 10 years. Two large cases we began 

tracking in our 2011 report, Lehman Brothers and Washington Mutual, are 

moving forward, but these cases along with the more recent bankruptcy 

of MF Global illustrate the challenges in resolving large, complex financial 

institutions.

As we reported last year, tracking financial company bankruptcies is 

difficult because data are limited. Specifically, data on the number of 

financial company bankruptcies and their outcomes have been difficult to 

obtain. Neither AOUSC, the Trustees’ Office in Justice, nor FDIC collect 

information on the number of financial companies in bankruptcy. We 

previously reported that AOUSC collects some data on bankruptcy 

outcomes, such as the closing date for large cases. However, AOUSC 

does not specifically include information on bankruptcy cases involving 

financial institutions, or track outcomes such as the value of creditor 

returns or the value of firms emerging from bankruptcy. The bankruptcy 

courts only collect data on the type of business in which an institution is 

engaged if the data are pertinent to provisions of the Code (for example if 

the business was a broker-dealer subject to a SIPA proceeding) and 

these data are used for case processing rather than overall study. 

AOUSC officials told us they have been considering having the 

bankruptcy courts include the North American Industry Classification 

 

68See 75 Fed. Reg. 75208 (Dec. 2, 2010) for the proposed securities swap reporting rule. 

In addition, an SEC official told us that under a form all SEC-registered investment 

advisers must file with SEC, they are requested to include an LEI for either themselves or 

their fund. Similarly private funds (hedge funds) also will be requested to list an LEI. Under 

a proposed rule, SEC would provide stock exchanges with the option of using LEIs to 

identify broker-dealers and all entities with which the broker-dealer executes trades. 75 

Fed. Reg. 32556 (June 8, 2010).

Financial Company 

Bankruptcies Remain 

Difficult to Track and 

Several Major Cases 

Move Forward

Data on Financial 

Company Bankruptcies 

Are Limited
 

Page 33 GAO-12-735 Bankruptcy

System code when a company files for bankruptcy. However, AOUSC 

and Federal Judicial Center officials told us that this new requirement 

would require a modification to the Official Bankruptcy Forms. These 

officials told us that this process generally takes 2 years and follows the 

process for amending the Federal Rules of Bankruptcy Procedure, except 

the process does not require approval by the Supreme Court or an 

opportunity for review by Congress. 

AOUSC provides the Trustee Program’s bankruptcy filing data. Officials 

told us these data include whether the debtor is a person or a corporation, 

whether it is a small business, the case number, the name and address of 

the debtor, and the status of the case (that is, whether a plan has been 

filed or if the case has been dismissed), and other types of information. 

However, officials told us they do not flag financial companies and cannot 

track them separately. FDIC officials told us that although they track 

individual cases of bank holding companies in bankruptcy, such as 

Washington Mutual, Inc. and Colonial Bank, they do not have a database 

that aggregates these case records.

Although AOUSC officials told us that they currently were not routinely 

collecting any data that would allow the identification and tracking of 

financial company bankruptcies, AOUSC and the Federal Judicial Center 

have undertaken a collaborative effort to create a specialized database of 

financial companies that have filed for bankruptcy protection from 2000 to 

2010, but they have concerns about the reliability of these data as they 

are untested for this purpose.

69 According to a Federal Judicial Center 

official, the purpose of the database is to compile information useful in 

understanding the effectiveness of Chapter 7 and Chapter 11 of the Code 

in facilitating the orderly liquidation or reorganization of financial 

companies. Officials told us developing such a database has been 

challenging, due to the resources needed and coding concerns.70

 

69AOUSC officials told us the reported court data are reliable for the purpose of reporting 

required statutory case statistics. 

A 

Federal Judicial Center official told us they had developed an online 

coding form to document more information about each case and held a 

training session for the student coders. One of the items researchers 

70Because of the time needed to review individual court dockets, AOUSC and Federal 

Judicial Center staff have recruited University of Maryland law students to assist in the 

initial coding effort.
 

Page 34 GAO-12-735 Bankruptcy

must code is the type of financial company, which is not information the 

courts currently collect. Some outcomes included in the database, such 

as details about the sale of all assets, are more difficult to find in court 

dockets. In addition, the official told us determining the level of detail on 

each case to include in the database has been a challenge. For example, 

the official told us they attempted to limit the complexity of information for 

staff to code, while still documenting the necessary data for further study. 

To address this issue, the official told us that the Federal Judicial Center 

is undertaking various data verification processes, including a process by 

which two independent coders will code the same information and a third, 

more experienced researcher will reconcile any differences between 

them.71

As in our 2011 report, to examine the number of large financial 

companies filing for bankruptcy protection, we matched AOUSC data on 

Chapter 11 megacases with data from a private firm on financial company 

bankruptcies to determine the number of financial companies in 

bankruptcy during the past decade. Table 2 describes both the total 

megacase filings and those megacases that are financial companies.

Despite these efforts, AOUSC officials told us that they currently 

are not able to determine how effective this database will be in allowing 

them to track large financial company bankruptcies, partly because of 

concerns over using data reported by the companies filing for bankruptcy.

Table 2: Chapter 11 Mega-Bankruptcy Filings, by Total Filings and Financial

Institution Filings, 2000 through 2011

Chapter 11 mega-case filings

Year

Total number of 

filings

Number of financial 

institution filings

2000 63 2 

2001 101 1 

2002 88 2 

2003 73 1 

2004 54 0 

2005 31 2 

2006 25 0 

2007 13 4 

 

71This process is also known as “double-coding for inter-rater reliability.” 
 

Page 35 GAO-12-735 Bankruptcy

Chapter 11 mega-case filings

Year

Total number of 

filings

Number of financial 

institution filings

2008 79 4 

2009 118 6 

2010 40 1 

2011 35 1 

Total 720 24

Sources: GAO analysis of AOUSC and New Generations data.

We continued to monitor two financial megacases, Washington Mutual, 

Inc. (Washington Mutual) and Lehman Brothers Holdings, Inc. (Lehman) 

and began monitoring a third, MF Global Holdings Ltd. (MF Global). 

Washington Mutual and Lehman are making progress in their bankruptcy 

proceedings, with several issues outstanding. Both financial institutions 

filed for Chapter 11 protection in September 2008. A new case involves 

MF Global, a holding company with a broker-dealer and commodity

broker, which filed for Chapter 11 protection in October 2011. Each case 

illustrates the complexities of liquidating large financial institutions.

Washington Mutual. As we discussed in our 2011 report, the parties to 

the bankruptcy had agreed to a revised settlement report in late 2010, but 

confirmation of that plan was delayed due to various claims by 

shareholders and some creditors. These delays continued throughout 

2011 because of additional hearings to discuss allegations of insider 

trading by hedge funds. Shareholders alleged that several hedge funds 

had access to discussions about the settlement plan through their 

attorneys and later bid on creditor claims. The parties entered mediation 

in October 2011 and reached a settlement and submitted a plan on 

December 12, 2011. A Delaware bankruptcy court judge confirmed the 

plan on February 17, 2012. As discussed in the 2011 report, the plan set 

forth the allocation of the tax refund among all of the parties: up to $2.2 

billion to Washington Mutual’s holding company; up to $2.2 billion to J.P. 

Morgan Chase, Inc. (the new owner of the depository bank); up to $850 

million to FDIC; and $335 million to the bank’s bondholders. As of May 

2012, the judge told us that she had been advised that the majority of the 

claims had been resolved. Further payouts will be distributed through a 

liquidating trust. Washington Mutual, Inc. is being reorganized as a 

reinsurance company that will be funded by capital contributions from 

new bondholders, not by the creditors from the original debtor.

Three Major Financial 

Institution Bankruptcy 

Cases Continued to Move 

Forward
 

Page 36 GAO-12-735 Bankruptcy

Lehman Brothers. On June 29, 2011, Lehman filed a disclosure 

statement that set out the plan for distribution of assets to the creditors of 

23 Lehman debtor entities. This plan was made after extensive 

negotiations with representatives of major creditor groups, including those 

that supported substantive consolidation and those that did not. This plan 

represents a compromise between the parties by providing for 

adjustments in payments to creditors. In November 2011, creditors 

approved Lehman’s reorganization plan. The bankruptcy court confirmed 

the plan in December 2011. The plan included numerous settlements 

between the holding company and other counterparties, including a series 

of bilateral settlements with foreign affiliates and creditors. As a result, 

creditors reduced the amount of claims asserted against Lehman by more 

than $295 billion. According to Lehman, distributions to creditors totaling 

$22.5 billion began on April 17, 2012. A second distribution is planned for 

September 2012.

The resolution of Lehman’s broker-dealer, Lehman Brothers Inc., 

continues through the SIPC process. According to SIPC officials, almost 

all of the 100,000 claims had been satisfied as of May 2012. However, 

some of the remaining claims are among the largest and involve complex 

litigation over who meets the definition of “customer” under SIPA.

72

According to the SIPA Trustee, there are over 2,100 claims with a total 

value of nearly $42 billion that are still unresolved. One of the largest of 

these claims involves Lehman’s overseas affiliate—Lehman Brothers 

International, Europe (LBIE)—which is pursuing two types of claims 

against Lehman Brothers Inc.73 The first is an “omnibus customer claim” 

on behalf of approximately 1,100 LBIE clients against Lehman Brothers 

Inc., of which $6 billion in claims for securities and $2 billion in claims for 

cash have been allowed by the SIPA Trustee. A remaining $6.7 billion 

remains under dispute.74

 

72Under SIPA, customers generally receive their distribution before any other group. 

Generally, a “customer” means any person who has a claim on account of securities 

received, acquired, or held by the debtor in the ordinary course of business. 15 U.S.C. § 

78lll(2).

The second is a “house claim” on its own behalf 

against Lehman Brothers Inc., of which $8.9 billion remains under 

dispute. The trustee said he does not recognize LBIE as a “customer” of 

Lehman Brothers Inc. because it does not meet the definition of 

73LBIE was Lehman’s principal European broker-dealer. 

74See SIPA Trustee report.
 

Page 37 GAO-12-735 Bankruptcy

“customer” under SIPA. According to SIPC officials, Lehman Brothers Inc. 

never held reserves on behalf of LBIE. These issues remain in litigation 

and may go to trial in 2013.

The SIPA Trustee for Lehman Brothers Inc. has initiated litigation against 

other counterparties over payment distribution, which also remains 

ongoing. In the first case, the SIPA Trustee is in litigation with Barclays 

involving issues surrounding its purchase of assets of Lehman Brothers 

Inc., immediately after Lehman filed for bankruptcy. According to the 

SIPA Trustee’s report, the dispute centers on competing interpretations of 

the Asset Purchase Agreement (defining the terms of the sale of certain 

Lehman Brothers Inc. assets to Barclays) between Lehman, Barclays, 

and Lehman Brothers, Inc. and involves contested claims to 

approximately $7 billion of “disputed assets.”75 This case is currently on 

appeal.76

In a second case, SIPC officials told us the SIPA Trustee has filed an 

adversary proceeding against Citibank seeking the return of a $1 billion 

deposit Lehman Brothers Inc. made with Citibank during Lehman 

Brothers Inc.’s last week in operation. The case involves Citibank’s setoff 

of Lehman Brothers Inc.’s obligations against Lehman Brothers Inc.’s 

deposits at Citibank and affiliated entities.77

 

75The “disputed assets” consist of assets in Lehman Brothers Inc.’s Rule 15c3-3 customer 

reserve accounts (the “Rule 15c3-3 Assets”), margin used to support derivatives trading 

(the “Margin Assets”), and certain assets in LBI’s clearance boxes at the Depository Trust 

and Clearing Corporation (the “Clearance Box Assets”). 

Citibank claims it set off the 

deposit shortly before Lehman Brothers Inc.’s SIPA liquidation process 

began in September 2008. The SIPA Trustee also has been seeking the 

turnover of approximately $300 million deposited in Lehman Brothers Inc. 

accounts at various Citibank locations around the world. According to the 

SIPA Trustee, Citibank has been attempting to set off these deposits 

against a component of the Lehman Brothers Inc. obligations 

76According to the SIPA Trustee, both he and Barclays appealed portions of the 

bankruptcy court’s opinion to the U.S. District Court for the Southern District of New York. 

On June 5, 2012, the District Court issued its order, and the SIPA Trustee has filed an 

appeal to the Second Circuit.

77Setoff is essentially the right to balance and cancel mutual claims between parties. 
 

Page 38 GAO-12-735 Bankruptcy

(approximately $1.26 billion) that are related to a settlement service 

provided by Citibank.78

In addition, the SIPA Trustee has been pursuing claims against LBIE on 

behalf of the broker-dealer’s customers. The SIPA Trustee alleges that 

LBIE has assets that belong to Lehman Brothers Inc. customers. 

According to the SIPA Trustee, due to the hundreds of thousands of 

transactions between Lehman Brothers Inc. and LBIE, the final outcome 

and amounts available for SIPC’s customer distribution are heavily 

dependent on LBIE’s own resolution in the United Kingdom. The SIPA 

Trustee has filed claims against LBIE totaling almost $16 billion. 

According to the SIPA Trustee, he and his advisers have been engaged 

in discussions with LBIE about the extent to which LBIE will allow the 

SIPA Trustee’s claim. The SIPA Trustee said the result of this process will 

have a major impact on the resolution of the U.S.-based Lehman Brothers 

Inc. estate and the SIPA Trustee’s ability to satisfy claims of customers 

and other creditors of the broker-dealer.

MF Global. MF Global has been in the bankruptcy process since October 

31, 2011, and has faced challenges due to missing customer funds and 

property. MF Global was a large, globally active company with a

commodity and securities broker-dealer. The firm was based in the United 

States, with operations in multiple countries, including Australia, Canada, 

Hong Kong, India, Japan, Singapore, and the United Kingdom. As of mid2011, the holding company had total assets of almost $46 billion. MF 

Global’s stock price declined during 2011, falling from about $8 a share at 

the start of the year to below $4 in early October and below $2 by late 

October. According to the SIPA Trustee, MF Global’s exposure to 

European debt and poor earnings reports led to credit downgrades and 

increased demands for collateral from MF Global’s counterparties. This in 

turn led to an increased loss of confidence in MF Global as customers 

began to close their accounts and withdraw funds.

According to CFTC, the failure of the MF Global commodity broker (MF 

Global Inc.) is unprecedented in the size and scope of missing customer 

funds. Ordinarily, the designated self-regulatory organization, in 

coordination with CFTC, would have arranged for the sale of a failed 

 

78Specifically, the settlement service related to payments for foreign exchange 

transactions through the Continuous Linked Settlement system.
 

Page 39 GAO-12-735 Bankruptcy

commodity broker to another commodity broker, but in the case of MF 

Global Inc., the missing customer funds and possible fraud prevented this 

from occurring, according to CFTC officials. These officials said they 

increased their involvement in the MF Global case after the company was 

downgraded by credit rating agencies on October 27, 2011. Despite 

repeated inquiries, MF Global Inc. was not able to provide supporting 

records for its calculations of segregated customer accounts. Because 

CFTC lacks authority to put the commodity broker into bankruptcy, when 

customer money was found missing, SEC and CFTC determined that a 

SIPC-led bankruptcy was the appropriate course of action to protect 

customer accounts and assets. 

The MF Global bankruptcy has highlighted issues related to resolving an

international broker-dealer and commodity broker and the effect on 

customer payments. According to SIPC officials, for the securities estate, 

the SIPA Trustee is using SIPA, and for the commodities estate, the 

Trustee is applying subchapter IV of Chapter 7 of the Code to the extent 

consistent with SIPA, as well as applicable commodities law.79

 

7915 U.S.C. § 78fff-1(b). 

While a 

SIPA proceeding and the bankruptcy process for a commodity broker are 

similar, there are important differences. Under the bankruptcy process for 

a commodity broker, to the extent that the debtor’s general estate is 

insufficient to pay for the estate’s administrative expenses, these 

expenses are paid from customer property ahead of the claims of 

customers. However, under the SIPA process, customer property is used 

to pay customers, and is available to pay estate expenses only if all 

customers have been satisfied in full. These differences could have a 

distinct effect on the funds available to customers, depending on the 

amount of the administrative expenses being paid compared to the 

amount of the general estate and the amount of the customer claims. In 

addition, SIPC may advance up to $500,000 for each customer holding 

securities (and a maximum of $250,000 for customers holding cash) while 

the liquidation is ongoing, which enables the trustee to provide some 

relief to securities customers relatively quickly. SIPC has no authority to 

make advances to satisfy commodities claims and the liquidation process 

for a commodity broker has no such provision. In MF Global, more than 

30,000 commodity customer claims were filed compared with 

approximately 300 securities customer claims.
 

Page 40 GAO-12-735 Bankruptcy

Because different customer estates are available to securities and 

commodity customers, each type of customer is receiving a different 

recovery percentage. CFTC officials told us they have been working to 

identify customer property for these estates, and SIPC officials told us the 

CFTC has closely cooperated with the SIPA Trustee. 80

According to the SIPA Trustee, a large volume of transactions occurred in 

the final week of MF Global’s operations. The SIPA Trustee’s report 

stated that the company’s information technology system could not 

handle this increased volume, leading to transactions that were not 

recorded or recorded incorrectly. The report estimated that “fail 

transactions” (in which a counterparty fails to deliver cash or securities) 

were five times the normal volume in the final week. Following the 

bankruptcy filing, the SIPA Trustee conducted an investigation examining 

840 cash transactions in excess of $10 million that totaled $327 billion 

and 20,000 cash transfers below $10 million that totaled $9 billion. In 

addition the SIPA Trustee has been examining securities transactions 

valued at more than $100 billion. The SIPA Trustee has sought to 

connect cash transfers from counterparties to the transfers of securities 

from MF Global to locate more customer funds.

However, SIPC 

officials said the CFTC’s regulations that implement bankruptcies for 

commodity brokers have been cumbersome to follow. In addition, 

according to SIPC officials, the SIPA Trustee’s authority to conduct bulk 

transfers from the insolvent commodity broker-dealer to other brokerdealers is vague.

The resolution of MF Global Inc. also has been hampered by differences 

in laws of various jurisdictions and the location of foreign assets. 

According to the SIPA Trustee, differences in insolvency laws and a lack 

of legal precedent have contributed to significant gaps in commodity 

customer protection between the United States and foreign jurisdictions. 

SIPC officials and the SIPA Trustee said customers who had accounts for 

trading on domestic exchanges and customers who had accounts to take 

physical delivery of commodities received an 80 percent return on their 

account from the first interim distribution; however, the customers with 

accounts for trading on foreign exchanges will receive only a 10 percent 

return from this distribution. The officials explained that most of the 

 

80Commodity customer property includes property unlawfully converted that is still part of 

the estate, 17 CFR § 190.08(a)(ii)(F), and received by margin that was withdrawn and 

recovered by avoidance powers of the trustee.17 CFR § 190.08(a)(ii)(D).
 

Page 41 GAO-12-735 Bankruptcy

property for customers on foreign exchanges is in the United Kingdom 

and according to the SIPA Trustee, these assets are now under the 

control of foreign bankruptcy trustees, similar to other international 

bankruptcies. The SIPA Trustee said that recovery of foreign assets was 

uncertain and would take time, adding that these issues were usually the 

last to be resolved and only after litigation.81

The recent bankruptcy cases involving large complex financial institutions 

illustrate the potential challenges FDIC will have in an OLA proceeding, 

including resolving a securities and commodity broker, a company with 

significant international presence, and cases involving complex litigation. 

As described previously, MF Global customer property may be located in 

other countries, complicating the trustee’s efforts to obtain it. The trustee 

for Lehman’s broker-dealer has been involved in litigation with one of 

Lehman’s foreign affiliates for several years. Because OLA will only apply 

to domestic entities, international coordination and voluntary cooperation 

with foreign regulators will be essential for the resolution of a global 

company. As discussed earlier, FDIC and other regulators have been 

taking steps to improve international coordination of the resolution of 

large, systemically important financial institutions but challenges remain. 

Regulators have yet to clarify the roles and responsibilities of FDIC and 

SIPC during the liquidation of a broker-dealer under OLA, including the 

treatment of securities customers, commodity customers, and general 

creditors. On May 3, 2012, FDIC conducted an exercise with SEC and 

CFTC simulating a hypothetical failure of a systemically important 

financial institution with both a securities broker and commodity broker to 

better understand gaps in the OLA process and assist in their rulemaking 

process.

At a June 1, 2012, hearing, a 

target date of April 9, 2013, was set by the U.K. court.

We provided a draft of this report to AOUSC, CFTC, Departments of 

Justice and the Treasury, FDIC, Federal Judicial Center, Federal 

Reserve, National Association of Insurance Commissioners, SEC, and 

 

81As noted in GAO-11-707, regulators and legal officials have mechanisms to coordinate 

the bankruptcies of international companies, such as the United Nations Commission on 

International Trade Law’s Model Law on Cross-Border Insolvency (adopted in the United 

States as Chapter 15 of the Bankruptcy Code), insolvency protocols, and memorandums 

of understanding, but these are not comprehensive. Commodity brokers and entities 

subject to SIPA proceedings are outside Chapter 15. 11 U.S.C. § 1501(c). 

Agency Comments 

and Our Evaluation
 

Page 42 GAO-12-735 Bankruptcy

SIPC for review and comment. The National Association of Insurance 

Commissioners did not provide comments. We received technical 

comments from the remaining agencies, which we incorporated as 

appropriate. 

We are sending copies of this report to the appropriate congressional 

committees, the Director of the Administrative Office of the U.S. Courts, 

the Chairman of the Commodity Futures Trading Commission, the 

Assistant Attorney General for Administration at the Department of 

Justice, the Secretary of the Treasury, the Chairman of the Federal 

Deposit Insurance Corporation, the Director of the Federal Judicial 

Center, the Chairman of the Board of Governors of the Federal Reserve 

System, the Chief Executive Officer of the National Association of 

Insurance Commissioners, the Chairman of the Securities and Exchange 

Commission, and the Chairman of the Securities Investor Protection 

Corporation, and other interested parties. The report also is available at 

no charge on the GAO website at http://www.gao.gov. 

If you or your staff members have any questions about this report, please 

contact Alicia Puente Cackley at (202) 512-8678 or cackleya@gao.gov. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this report. Major contributors to 

this report are listed in appendix III. 

Alicia Puente Cackley

Director, Financial Markets and

 Community Investment
 

Page 43 GAO-12-735 Bankruptcy

List of Committees

The Honorable Tim Johnson

Chairman

The Honorable Richard C. Shelby

Ranking Member

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable Patrick Leahy

Chairman

The Honorable Charles E. Grassley

Ranking Member

Committee on the Judiciary

United States Senate

The Honorable Spencer Bachus

Chairman

The Honorable Barney Frank

Ranking Member

Committee on Financial Services

House of Representatives

The Honorable Lamar Smith

Chairman

The Honorable John Conyers, Jr.

Ranking Member

Committee on the Judiciary

House of Representatives
Appendix I: Objectives, Scope, and 

Methodology

Page 44 GAO-12-735 Bankruptcy

As required under section 202 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank Act), this report examines: (1) 

actions the U.S. District Court for the District of Columbia (D.C. District 

Court) has taken in response to the judicial review provision of Orderly 

Liquidation Authority (OLA), including any revisions to Local Civil Rule 85; 

(2) federal rules or regulations relating to OLA and efforts to improve 

international coordination, including living wills, in resolving financial 

companies; and (3) data collection efforts and the outcomes of financial 

institutions that were in the bankruptcy process.

Generally to address our objectives, we reviewed the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010 

and its rulemaking requirements. We also conducted interviews with 

officials at the Administrative Office of the U.S. Courts (AOUSC); 

Commodity Futures Trading Commission; Federal Deposit Insurance 

Corporation (FDIC); Board of Governors of the Federal Reserve System 

(Federal Reserve); Federal Judicial Center; Securities and Exchange 

Commission; Securities Investor Protection Corporation; Department of 

the Treasury (Treasury); and the U.S. District Court for the District of 

Columbia (D.C. District Court). We reviewed relevant literature and 

reports issued since our last report, including those written by AOUSC 

and the Federal Reserve in response to mandates in the Dodd-Frank Act.

Specifically to address the first objective on actions the D.C. District Court 

took in response to the judicial review provision of the OLA, we monitored 

the website for the D.C. District Court for changes in Local Civil Rule 85. 

We interviewed the Chief Judge and other officials from the court to 

discuss how the rule would be implemented in case of a petition under 

OLA and the changes made to the rule in response to comments from 

FDIC and Treasury. We also discussed these changes with officials from 

FDIC and Treasury to obtain their views on the amended rule and how 

they expected the rule to be implemented.

To address the second objective on federal regulations relating to OLA 

and the resolution of financial institutions, we searched the Federal 

Register and monitored the websites of FDIC and the Federal Reserve to 

determine if relevant rules related to FDIC’s authority under Title II and 

resolution planning had been issued. We also monitored the development 

of other related rules, including the Federal Reserve’s rule related to the 

definition of nonbank financial companies and the Financial Stability 

Oversight Council’s designation of systemically important financial 

institutions. We reviewed proposed, interim final, and final rules under 

these authorities; they are presented in appendix II. We reviewed 

Appendix I: Objectives, Scope, and 

Methodology 
Appendix I: Objectives, Scope, and 

Methodology

Page 45 GAO-12-735 Bankruptcy

comment letters on the rules, testimonies by regulatory officials, 

roundtable discussions held by FDIC, legal opinions and law firm client 

updates, and seminars conducted by law firms on FDIC’s new authority 

under Title II. We reviewed updates from the Financial Stability Board on 

international coordination of related resolution and recovery planning and 

monitored the websites of the Financial Stability Board and Treasury’s 

Office of Financial Research for developments on the Legal Entity 

Identifier. We also participated in financial industry presentations on the 

development and challenges of adoption of the Legal Entity Identifier.

To address the third objective on data collection and the status of 

financial institutions in the bankruptcy process, we spoke to officials from 

AOUSC, the Federal Judicial Center, and the Trustee Program at the 

Department of Justice to learn more about potential sources of financial 

company bankruptcy data. However, as discussed in our report, we found 

that no single source for financial company bankruptcy data is available. 

To provide some background information on the number of bankruptcies 

of large financial institutions from January 1, 2010, through December 31, 

2011, we used data (as we did for last year’s report) on Chapter 11 

megacases collected by AOUSC and compared these cases with 

bankruptcy data from New Generations Research, Inc. New Generations, 

Inc., is a private company that takes data from U.S. bankruptcy filings and 

augments it with industry-specific data, including the type of industry of 

the debtor. We spoke with federal officials familiar with New Generations, 

Inc., and they consider it to be reliable for tracking bankruptcy cases. We 

also spoke to representatives from New Generations, Inc. regarding their 

data collection and reliability methods. We concluded that the data were 

reliable for tracking bankruptcy cases. AOUSC provided lead case data 

on megacases (involving assets of more than $100 million and more than 

1,000 creditors) that included date and location of filing and some 

information on how closed cases were concluded (such as by sale, 

liquidation, or reorganization). By matching data on bankruptcies of 

financial institutions from New Generations with the AOUSC-provided 

megacase data, we were able to provide some context on the number of 

Chapter 11 megacases that represented financial institutions. We decided 

the data were sufficiently reliable for that purpose because there was a 

reasonable match between cases in the two data sets. As with our 

previous report, AOUSC provided only data on Chapter 11 cases and not 

Chapter 7. According to AOUSC officials, virtually all megacases were 

originally filed as Chapter 11 cases.

In addition to our general tracking of financial institution bankruptcies, we 

continued to monitor two major financial company bankruptcies—Lehman 
Appendix I: Objectives, Scope, and 

Methodology

Page 46 GAO-12-735 Bankruptcy

Brothers Holdings, Inc. and Washington Mutual, Inc.—on which we 

reported as case studies in 2011.1

We conducted this performance audit from August 2011 to July 2012, in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

We also began monitoring a new 

major financial company bankruptcy, MF Global Holdings, Inc., that filed 

for Chapter 11 protection in October 2011. For each of these cases, we 

reviewed court documents such as court orders, trustee reports, and 

reorganization plans. We also interviewed federal officials on their 

involvement in these cases. We reviewed these data to provide illustrative 

examples of some of the challenges and complexities of financial 

company megacases; for example, challenges in resolving an 

internationally active company or cases involving complex legal issues. 

We verified information about these cases with federal officials. We 

concluded that the information in these sources was sufficiently reliable 

for our purposes.

 

1

We also reported on the bankruptcy of CIT Group in our 2011 report, but this case was 

completed.
Appendix II: Status of Selected Rules Related 

to the Orderly Liquidation Authority and 

Resolution Planning under the Dodd-Frank Act

Page 47 GAO-12-735 Bankruptcy

The following are rules either mandated by the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (Dodd-Frank Act) or initiated by the 

Federal Deposit Insurance Corporation (FDIC) or other agencies. As 

discussed in the report, FDIC has been considering additional rules under 

its Title II authority. Table 3 includes a list of rules and actions that have 

been completed by the regulators and the courts related to the orderly 

liquidation authority (OLA), resolution planning, or bankruptcy.

Table 3: Selected Final Rules and Actions Completed, as of May 15, 2012

Agency/

court

Section of 

Dodd-Frank 

Act Rule Status 

FDIC and the 

Board of 

Governors of 

the Federal 

Reserve 

System 

(Federal 

Reserve)

Section 165(d) Resolution Plans Final Rule. FDIC and the Federal Reserve published the final 

rule on November 1, 2011 (76 Fed. Reg. 67323).a

The final rule was based on a proposed rule from 

April 2011 (76 Fed. Reg. 22648).

The first plans are due in July 2012.

FDIC also issued a resolution plans rule for 

depository institutions with $50 billion in total 

assets effective April 1, 2012 (77 Fed. Reg. 3075, 

published January 23, 2012).

The April rule supercedes the interim final rule 

effective January 1, 2012 (76 Fed. Reg. 58379, 

published September 21, 2011).

U.S. District 

Court for the 

District of 

Columbia

Section 202(b) Local Civil Rule 85: Outlines the court’s judicial 

review of a petition from the Secretary of the 

Treasury to allow FDIC to act as a receiver for 

a potentially insolvent financial company.

The court issued the rule January 19, 2011, and 

amended the rule on July 6, 2011, after receiving 

comments from FDIC and the Department of the 

Treasury (Treasury).

FDIC Establishment of the FDIC Systemic 

Resolution Advisory Committee.

Office was established. Signed April 28, 2011 (76 

Fed. Reg. 25352, May 4, 2011).

FDIC Section 209 Orderly Liquidation Authority Final Rule:

Final rule to implement certain provisions to 

resolve covered financial companies, including 

(i) recoupment of compensation from senior 

executives and directors; (ii) the clarification of 

power to avoid fraudulent or preferential 

transfers; (iii) the priorities of expenses and 

unsecured claims; and (iv) the administrative 

process for initial determination of claims.

FDIC issued this final rule on July 15, 2011, and it 

became effective August 15, 2011 (76 Fed. Reg. 

41626).

This final rule incorporates aspects of earlier 

rulemakings:

• A notice of proposed rulemaking from October 

19, 2010, described as “Phase I” (75 Fed. 

Reg. 64173).

• An interim final rule on Phase I issued January 

25, 2011 (76 Fed. Reg. 4207).

• A proposed rulemaking from March 23, 2011 

(“Phase II”) (76 Fed. Reg. 16324).

FDIC Section 209 Mutual Insurance Holding Company Treated 

as Insurance Company Final Rule.

FDIC issued the final rule on April 30, 2012 (77 

Fed. Reg. 25349).

Sources: Dodd-Frank Act, D.C. District Court, FDIC, Federal Reserve, and Treasury.

Appendix II: Status of Selected Rules Related 

to the Orderly Liquidation Authority and 

Resolution Planning under the Dodd-Frank Act
Appendix II: Status of Selected Rules Related 

to the Orderly Liquidation Authority and 

Resolution Planning under the Dodd-Frank Act

Page 48 GAO-12-735 Bankruptcy

a

See table 4 for the status of various rules that have yet to be finalized.

We have listed the dates published in the Federal Register, rather than the date the agencies published on their websites. 

Table 4: Selected Proposed Rules and Actions in Progress, as of May 15, 2012

Agency/

court

Section of 

Dodd-Frank 

Act Rule Status 

Treasury-Office 

of Financial 

Research

Sections 151-

154

Global Initiative to Establish a Legal Entity 

Identifier (LEI) for Financial Institutions.

Treasury issued a proposed policy statement for 

comment on November 30, 2010. Comments were 

due January 31, 2011 (75 Fed. Reg. 74146).

The Financial Stability Board (an international 

body of regulators that addresses issues related to 

global financial stability) has created an LEI Expert 

Panel with the goal of introducing a global 

proposal for adoption by the G-20 summit in June 

2012.

Federal Reserve

a 

Section 102(b) Definition of Company “Predominantly 

Engaged in Financial Activities.”

The Federal Reserve published a Supplemental 

Notice of Proposed Rulemaking and Request for 

Comment on April 10, 2012 (77 Fed. Reg. 21494). 

Comments are due May 25, 2012.

This was based on an earlier proposed rule that 

was published on February 11, 2011 (76 Fed. 

Reg. 7731).

FDIC Section 209 Definition of Company Predominantly 

Engaged in Activities That Are Financial in 

Nature. 

As part of a proposed rule on OLA, FDIC 

proposed criteria for this definition (76 Fed. Reg. 

16324). However, in the final rule on OLA, FDIC 

stated that it would wait to finalize the criteria until 

the Federal Reserve issued its rule defining 

nonbank financial companies under Title I (76 Fed. 

Reg. 41626).b

FDIC and 

Treasury

The Federal Reserve’s proposed 

rule is not yet final (see above).

Section 

210(n)(7)

Calculation of the Maximum Obligation 

Limitation under OLA.

Proposed rule published November 25, 2011, for 

60-day comment period ending January 24, 2012 

(76 Fed. Reg. 72645). FDIC approved a final rule 

on April 23, 2012, but Treasury has not given final 

approval.

FDIC

c

Section 

210(c)(16) 

Enforcement of Subsidiary and Affiliate 

Contracts by FDIC as Receiver of a Covered 

Financial Company.

Proposed rule published March 27, 2012, for a 60-

day comment period ending May 29, 2012 (77 

Fed. Reg. 18127).

Sources: Dodd-Frank Act, FDIC, Federal Reserve, and Treasury. 

a

Treasury reported delivering global LEI governance recommendations for endorsement by the G20 

in June 2012.

b

After we completed our analysis, FDIC published an amendment to the proposed criteria on June 18, 

2012, that clarified the activities that would be considered financial in nature or incidental thereto for 

the purposes of Title II (77 Fed. Reg. 36194). 

c

Treasury approved the rule, and it was published on the June 22, 2012 (77 Fed. Reg. 37554).
Appendix II: Status of Selected Rules Related 

to the Orderly Liquidation Authority and 

Resolution Planning under the Dodd-Frank Act

Page 49 GAO-12-735 Bankruptcy

Finally, table 5 provides the status of selected required rules that have yet 

to be proposed or had any action taken.

Table 5: Selected Required Rules That Have Not Yet Been Proposed or Had Action as of May 15, 2012

Agency/

court

Section of 

Dodd-Frank Rule Status 

FDIC/Securities and 

Exchange 

Commission (SEC)

Section 

205(h)

Orderly Liquidation Procedures for BrokerDealers: Issue joint rules, in consultation 

with Securities Investor Protection 

Corporation (SIPC), establishing 

procedures for FDIC, SEC, and SIPC to 

implement orderly liquidation for covered 

brokers and dealers.

Rule has not been proposed. No mandated 

timeline. 

FDIC/Primary 

Financial Regulators

Section 

210(c)(8)(H) a Joint Rulemaking on Recordkeeping for 

Qualified Financial Contracts: The DoddFrank Act requires the primary financial 

regulatory agencies to adopt rules 

regarding recordkeeping requirements for 

qualified financial contracts of financial 

companies necessary or appropriate to 

assist FDIC in the event of an orderly 

liquidation. If no rule is in place by July 21, 

2012, then the chairperson of the Financial 

Stability Oversight Council (Secretary of 

the Treasury), in consultation with FDIC,

shall develop a rule. 

According to interviews with agency officials, FDIC 

has circulated a draft for review among regulators, 

but it has not been publicly released. A final or 

interim rule is required to be finalized by July 21, 

2012.

FDIC/Treasury Section 

210(o)(6)

Risk-Based Assessment: The Dodd-Frank 

Act requires FDIC to issue rules to carry 

out risk-based assessments of covered 

financial companies to cover obligations 

incurred by FDIC in becoming receiver of a 

failed financial company. 

Treasury officials told us that they had not been 

consulted on the drafting this rule. There is no 

statutory deadline. 

FDIC/Federal 

Banking Agencies

Section 

616(d)

Source of Strength Proposed Rule: The 

Dodd-Frank Act requires the appropriate 

federal banking agencies to jointly issue 

rules requiring bank holding companies, 

savings and loan holding companies, and 

other companies that control insured 

depository institutions to serve as sources 

of financial strength for their subsidiary 

depository institutions.

FDIC and Federal Reserve staff told us that they 

are working with the Office of the Comptroller of 

the Currency on this rule, which is required by July 

21, 2012.

Sources: Dodd-Frank Act, FDIC, Federal Reserve, and Treasury.

a

Primary Financial Regulators are defined in Section 2 of the Dodd-Frank Act.
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 50 GAO-12-735 Bankruptcy

Alicia Puente Cackley, (202) 512-8678 or cackleya@gao.gov

In addition to the individual named above, Debra Johnson, Assistant 

Director; Nancy Barry; Rachel DeMarcus; Katherine Bittinger Eikel; 

William R. Chatlos; Dean P. Gudicello; Jonathan M. Kucskar; Marc W. 

Molino; Barbara M. Roesmann; and Jessica Sandler made major 

contributions to this report. Technical assistance was provided by JoAnna 

Berry and David Martin.

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(250629)
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