Source: https://www.law.cornell.edu/wex/dodd-frank_title_ii_-_orderly_liquidation_authority
Timestamp: 2020-05-26 11:01:57
Document Index: 435528168

Matched Legal Cases: ['§ 5383', '§ 203', '§ 203', '§ 203', '§ 203', '§ 5390', '§ 210', '§ 210', '§ 5385', '§ 205', '§ 5394', '§ 214']

Dodd-Frank: Title II - Orderly Liquidation Authority | Wex | US Law | LII / Legal Information Institute
In determining when a financial company should be placed in receivership under Title II, the Secretary of the Treasury applies a two part test. See 12 U.S.C. § 5383 (Dodd-Frank Act § 203). First, the Secretary looks at whether the company is in default, or in danger of default. See id. A company is in default when it is likely to file for bankruptcy, has incurred debts that will deplete all or most of its capital, has greater debts than assets, or will likely be unable to pay its debts in the normal course of business. See id. (Dodd Frank Act § 203(c)(4)). Second, the Secretary must evaluate the systemic risk involved in the potential default of the financial company. See id. (Dodd Frank Act § 203). Therefore, the Secretary must consider the effect of default on financial stability, low income, minority, or underserved communities, and on creditors, shareholders, and counterparties. See id. (Dodd-Frank Act § 203(b)). The Secretary also considers the likelihood of bankruptcy or private sector alternatives, and what future actions can be taken. See id. If these issues are considered, and the FDIC believes it should be appointed as receiver, the FDIC will take control of the assets, obligations, and operations of the company.
Receiver Duties of the FDIC
As a receiver, the FDIC takes on the duties of transferring or selling assets, creating bridge financial organizations that can help assume assets or liabilities during the liquidation process, and approving valid claims against the company that will need to be paid. To help fund the liquidation process, Title II creates the Orderly Liquidation Fund, a separate fund created by the U.S. Treasury to cover the administrative costs of liquidation for companies under this title. See 12 U.S.C. § 5390 (Dodd-Frank Act § 210(n)). The FDIC may avoid or invalidate certain prior transfers, agreements, leases, or compensation to executives that hinder the ability of the FDIC to carry out its duties. See id. (Dodd-Frank Act § 210). If the financial company is a broker or dealer, in addition to the FDIC appointment as receiver, the Securities Investor Protection Corporation (SIPC) is appointed as trustee that will take over managing any assets that are not transferred to a bridge company by the FDIC. See 12 U.S.C. § 5385 (Dodd-Frank Act § 205).
Elimination of Government Bailouts for Struggling Financial Institutions
One final provision of importance is the ban of use of taxpayer funds to preserve a company that has been put into receivership under Title II. See 12 U.S.C. § 5394 (Dodd-Frank Act § 214). In essence, this provision prevents any future government bailouts for struggling financial institutions, no matter how big, or how impactful their failure might be. This provision makes it even more critical that a liquidation under Title II work quickly and effectively; without the safety net of federal bailout money, a failing financial institution will have no choice but to liquidate.
Under Title II, large companies will need to consider this alternate resolution process, and produce plans for a quick and orderly wind-up in the case of financial distress or failure. The FDIC will promulgate additional rules to establish standards for the resolution plans and credit exposure reports that companies must provide. Additionally, the claims process under an orderly liquidation by the FDIC is modeled like the bankruptcy code claims process, but does have some differences that impact how Title II liquidation will operate. Large financial companies will need to keep in mind both the claims process codified in Title II and any FDIC rule promulgations that clarify that process.
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