[Federal Register: September 9, 1999 (Volume 64, Number 174)]
[Proposed Rules]
[Page 48968-48970]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09se99-11]
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Proposed Rules
Federal Register
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This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 48968]]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 360
RIN 3064-AC28
Treatment by the Federal Deposit Insurance Corporation as
Conservator or Receiver of Financial Assets Transferred by an Insured
Depository Institution in Connection With a Securitization or
Participation
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Federal Deposit Insurance Corporation (the FDIC) is
publishing for notice and comment a proposed rule regarding the
treatment by the FDIC, as receiver or conservator, of financial assets
transferred by an insured depository institution in connection with a
securitization or in the form of a participation. The purpose of the
rule is to resolve issues raised by Statement of Financial Accounting
Standards No. 125 (SFAS 125), as promulgated by the Financial
Accounting Standards Board (FASB), as to whether the FDIC's statutory
authority to repudiate contracts pursuant to section 11(e) of the
Federal Deposit Insurance Act (12 U.S.C. 1821(e)) would prevent a
transfer of financial assets by an insured depository institution in
connection with a securitization or in the form of a participation from
satisfying the ``legal isolation'' condition of SFAS 125. Failure to
satisfy this condition would prevent such a transfer from being
accounted for as a sale in financial statements and reports prepared in
accordance with generally accepted accounting principles (GAAP).
The proposed rule provides that the FDIC shall not, by exercise of
its statutory power to repudiate contracts, recover, reclaim, or
recharacterize as property of the institution or the receivership
financial assets that were transferred by an insured depository
institution in connection with a securitization or in the form of a
participation, provided that the transfer meets all conditions for sale
accounting treatment under GAAP, other than the ``legal isolation''
condition as it applies to an institution for which the FDIC may be
appointed as conservator or receiver, which the proposed rule is
intended to address. The proposed rule defines both ``securitization''
and ``participation,'' with ``participation'' specifically limited to
participations that are ``without recourse'' to the selling or ``lead''
institution. The proposed rule does not apply unless the insured
depository institution received adequate consideration for the transfer
of financial assets at the time of the transfer, and the documentation
effecting the transfer of financial assets reflects the intent of the
parties to treat the transaction as a sale, and not as a secured
borrowing, for accounting purposes. The proposed rule shall not be
construed as waiving or limiting any other rights or powers of the FDIC
as conservator or receiver of an insured depository institution to take
any action or exercise any power not specifically addressed in the
rule, including but not limited to any rights or powers of the FDIC
regarding any transfer taken in contemplation of the institution's
insolvency or with the intent to hinder, delay, or defraud the
institution or the creditors of such institution. The proposed rule
also provides that the FDIC shall not seek to avoid an otherwise
legally enforceable securitization agreement or participation agreement
executed by an insured depository institution solely because such
agreement does not meet the ``contemporaneous'' requirement of sections
11(d)(9), 11(n)(4)(I), and 13(e) of the Federal Deposit Insurance Act.
The proposed rule may be repealed by the FDIC upon 30 days notice
and opportunity for comment provided in the Federal Register, but in
the event of such repeal, the rule shall continue to be effective with
respect to any transfers made before the date of the repeal.
DATES: Written comments must be received by the FDIC on or before
November 8, 1999.
ADDRESSES: Send written comments to Robert E. Feldman, Executive
Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments
may be hand delivered to the guard station located at the rear of the
17th Street building on F Street on business days between 7:00 a.m. and
5:00 p.m. [FAX number (202) 898-3838, Internet address:
comments@FDIC.gov]. Comments may also be inspected and photocopied at
the FDIC Public Information Center, room 100, 801 17th Street, N.W.,
Washington, D.C. between 9:00 a.m. and 4:30 p.m. on business days.
FOR FURTHER INFORMATION CONTACT: Michael Krimminger, Division of
Resolutions and Receiverships, (202) 898-8950; Robert Storch, Division
of Supervision, (202) 898-8906; or Thomas Bolt, Legal Division, (202)
736-0168, Federal Deposit Insurance Corporation, 550 17th Street, N.W.,
Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
I. Background
Under generally accepted accounting principles, a transfer of
financial assets is accounted for as a sale if the transferor
surrenders control over the assets. One of the conditions for
determining whether the transferor has surrendered control is that the
assets have been isolated from the transferor, i.e., put presumptively
beyond the reach of the transferor, its creditors, and a trustee in
bankruptcy or a receiver. This is known as the ``legal isolation''
condition. Where the transferor is an insured depository institution
for which the FDIC may be appointed as conservator or receiver, the
issue arises whether financial assets transferred by such institution
in connection with a securitization or in the form of a participation
would be put beyond the reach of the FDIC as conservator or receiver
for such institution in light of (i) the statutory authority of the
FDIC to repudiate contracts to which such institution is a party and
(ii) the provisions of sections 11(d)(9), 11(n)(4)(I), and 13(e) of the
Federal Deposit Insurance Act regarding the enforceability of
agreements against the FDIC. The specific issues are whether the FDIC
might, in the exercise of its authority to repudiate contracts, avoid a
transfer of financial assets in connection with a securitization or in
the form of a participation, and recover such assets; and whether the
FDIC might, with respect to an agreement executed in relation to a
transfer of financial assets in connection with a securitization or
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with respect to a participation, assert the requirement of sections
11(d)(9), 11(n)(4)(I), and 13(e) of the Federal Deposit Insurance Act
that to be enforceable against the FDIC, any agreement that tends to
diminish or defeat the FDIC's interest in an asset must be executed
contemporaneously with the acquisition of the asset by the institution
(the ``contemporaneous'' requirement).
Pursuant to 12 U.S.C. 1821(e)(1), the FDIC, when acting as
conservator or receiver of any insured depository institution, has the
power to disaffirm or repudiate any contract or lease (i) to which the
institution is a party; (ii) the performance of which the conservator
or receiver, in the conservator's or receiver's discretion, determines
to be burdensome; and (iii) the disaffirmance or repudiation of which
the conservator or receiver determines, in the conservator's or
receiver's discretion, will promote the orderly administration of the
institution's affairs. Repudiation of a contract relieves the FDIC from
performing any unperformed obligations remaining under the contract.
Repudiation also entitles the other party to the contract to a claim
for damages, which are limited by statute to actual direct compensatory
damages determined as of the date of the appointment of the receiver or
conservator. See 12 U.S.C. 1821(e)(3).
Pursuant to sections 11(d)(9), 11(n)(4)(I), and 13(e) of the
Federal Deposit Insurance Act, no agreement that tends to diminish or
defeat the FDIC's interest in an asset acquired from an insured
depository institution is enforceable against the FDIC unless such
agreement meets certain requirements. One of those requirements is that
the agreement be executed by the depository institution and any person
claiming an adverse interest thereunder contemporaneously with the
acquisition of the asset by the institution.
In order for a transfer of financial assets by an insured
depository institution in connection with a securitization or in the
form of a participation to be accounted for as a sale, the proposed
rule provides that the FDIC shall not, by exercise of its authority to
disaffirm or repudiate contracts under 12 U.S.C. 1821(e), reclaim,
recover, or recharacterize as property of the institution or the
receivership any financial assets transferred by an insured depository
institution in connection with a securitization or in the form of a
participation. Although the repudiation of a securitization or
participation will not affect transferred financial assets, repudiation
will excuse the FDIC from performing any continuing obligations imposed
by the securitization or participation. If the FDIC, in order to
terminate such continuing obligations or duties, seeks to disaffirm or
repudiate an agreement or contract under which an insured depository
institution has transferred financial assets in connection with a
securitization or in the form of a participation, the FDIC will not
seek to reclaim, recover, or recharacterize as property of the
institution or the receivership such financial assets.
The proposed rule applies only to those securitizations or
participations in which the transfer of financial assets meets all
conditions for sale accounting treatment under generally accepted
accounting principles, other than the ``legal isolation'' condition as
it applies to institutions for which the FDIC may be appointed as
conservator or receiver, which the proposed rule is intended to
address.
As part of the definition of ``participation,'' the proposed rule
provides that a participation must be ``without recourse,'' that is,
the participation must not be subject to any agreement that requires
the lead to repurchase the participant's interest or to otherwise
compensate the participant upon the borrower's default on the
underlying obligation. The term ``without recourse'' does not, however,
preclude the lead institution from retaining a subordinated interest in
the participated obligation, against which losses are initially
allocated.
The proposed rule does not apply unless the insured depository
institution received adequate consideration for the transfer of
financial assets at the time of the transfer, and the documentation
effecting the transfer of financial assets reflects the intent of the
parties to treat the transaction as a sale, and not as a secured
borrowing, for accounting purposes.
The proposed rule shall not be construed as waiving, limiting or
otherwise affecting the rights or powers of the FDIC to take any action
or to exercise any power not specifically limited by this section,
including, but not limited to any rights, powers or remedies of the
FDIC regarding transfers taken in contemplation of the institution's
insolvency or with the intent to hinder, delay, or defraud the
institution or the creditors of such institution, or that is a
fraudulent transfer under applicable law.
The proposed rule further provides that the FDIC shall not seek to
avoid an otherwise legally enforceable securitization agreement or
participation agreement executed by an insured depository institution
solely because such agreement does not meet the ``contemporaneous''
requirement of sections 11(d)(9), 11(n)(4)(I), and 13(e) of the Federal
Deposit Insurance Act.
The proposed rule is intended to apply to securitizations and
participations that are engaged in by insured depository institutions
while the rule is in effect, even if the rule is later repealed.
Consequently, paragraph (g) provides that the rule will be effective
unless repealed by the FDIC upon 30 days notice and opportunity for
comment provided in the Federal Register, but in the event of such
repeal, the rule shall continue to be effective with respect to any
transfers made before the date of the repeal.
II. Paperwork Reduction Act
No collection of information pursuant to section 3504(h) of the
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in the
proposed rule. Consequently, no information was submitted to the Office
of Management and Budget for review.
III. Regulatory Flexibility Act
The proposed rule is consistent with the FDIC's current practice
and does not represent a change in the law with respect to
securitizations and participations. Pursuant to section 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601 et seq.), it is certified that
the proposed rule will not have a significant economic impact on a
substantial number of small business entities.
IV. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The FDIC has determined that this proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat.
2681 (1998).
List of Subjects in 12 CFR Part 360
Banks, banking, Savings associations.
For the reasons set out in the preamble, the FDIC Board of
Directors proposes to amend 12 CFR part 360 as follows:
PART 360--RESOLUTION AND RECEIVERSHIP RULES
1. The authority citation for part 360 is revised to read as
follows:
Authority: 12 U.S.C. 1821(d)(1), 1821(d)(11), 1821(e)(1),
1821(e)(8)(D)(i),
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1823(c)(4), 1823(e)(2); Sec. 401(h), Pub.L. 101-73, 103 Stat. 357.
2. Section 360.6 is added to part 360 to read as follows:
Sec. 360.6 Treatment by the Federal Deposit Insurance Corporation as
conservator or receiver of financial assets transferred in connection
with a securitization or participation.
(a) Definitions. (1) Beneficial interest means debt or equity (or
mixed) interests or obligations of any type issued by a special purpose
entity that entitle their holders to receive payments that depend
primarily on the cash flow from financial assets owned by the special
purpose entity.
(2) Financial asset means cash or a contract or instrument that
conveys to one entity a contractual right to receive cash or another
financial instrument from another entity.
(3) Participation means the transfer or assignment of an undivided
interest in all or part of a loan or a lease from a seller, known as
the ``lead'', to a buyer, known as the ``participant'', without
recourse to the lead, pursuant to an agreement between the lead and the
participant. Without recourse means that the participation is not
subject to any agreement that requires the lead to repurchase the
participant's interest or to otherwise compensate the participant upon
the borrower's default on the underlying obligation.
(4) Securitization means the issuance by a special purpose entity
of beneficial interests:
(i) The most senior class of which at time of issuance is rated in
one of the four highest categories assigned to long-term debt or in an
equivalent short-term category (within either of which there may be
sub-categories or gradations indicating relative standing) by one or
more nationally recognized statistical rating organizations; or
(ii) Which are sold in transactions by an issuer not involving any
public offering for purposes of section 4 of the Securities Act of
1933, as amended, or in transactions exempt from registration under
such Act pursuant to Regulation S thereunder (or any successor
regulation).
(5) Special purpose entity means a trust, corporation, or other
entity with a distinct standing at law separate from the insured
depository institution that is primarily engaged in acquiring and
holding (or transferring to another special purpose entity) financial
assets, and in activities related or incidental thereto, in connection
with the issuance by such special purpose entity (or by another special
purpose entity that acquires financial assets directly or indirectly
from such special purpose entity) of beneficial interests.
(b) The FDIC shall not, by exercise of its authority to disaffirm
or repudiate contracts under 12 U.S.C. 1821(e), reclaim, recover, or
recharacterize as property of the institution or the receivership any
financial assets transferred by an insured depository institution in
connection with a securitization or participation, provided that such
transfer meets all conditions for sale accounting treatment under
generally accepted accounting principles, other than the ``legal
isolation'' condition as it applies to institutions for which the FDIC
may be appointed as conservator or receiver, which is addressed by this
section.
(c) Paragraph (b) of this section shall not apply unless the
insured depository institution received adequate consideration for the
transfer of financial assets at the time of the transfer, and the
documentation effecting the transfer of financial assets reflects the
intent of the parties to treat the transaction as a sale, and not as a
secured borrowing, for accounting purposes.
(d) Paragraph (b) of this section shall not be construed as
waiving, limiting, or otherwise affecting the power of the FDIC, as
conservator or receiver, to disaffirm or repudiate any agreement
imposing continuing obligations or duties upon the insured depository
institution in conservatorship or receivership.
(e) Paragraph (b) of this section shall not be construed as
waiving, limiting or otherwise affecting the rights or powers of the
FDIC to take any action or to exercise any power not specifically
limited by this section, including, but not limited to, any rights,
powers or remedies of the FDIC regarding transfers taken in
contemplation of the institution's insolvency or with the intent to
hinder, delay, or defraud the institution or the creditors of such
institution, or that is a fraudulent transfer under applicable law.
(f) The FDIC shall not seek to avoid an otherwise legally
enforceable securitization agreement or participation agreement
executed by an insured depository institution solely because such
agreement does not meet the ``contemporaneous'' requirement of sections
11(d)(9), 11(n)(4)(I), and 13(e) of the Federal Deposit Insurance Act.
(g) This section may be repealed by the FDIC upon 30 days notice
and opportunity for comment provided in the Federal Register, but in
the event of such repeal, the section shall continue to be effective
with respect to any transfers made before the date of the repeal.
By order of the Board of Directors.
Dated at Washington, DC this 31st day of August, 1999.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 99-23384 Filed 9-8-99; 8:45 am]
BILLING CODE 6714-01-P