FDIC Board Approves Proposed Rule to Set Claims Process; Puts Burden of Proof on Officers and Directors to Exonerate Themselves

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The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) on March 15 approved a Notice of Proposed Rulemaking (NPR) to further clarify application of the Orderly Liquidation Authority (OLA) contained in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act. (The NPR issued an interim rule on the same subject on January 18, which "clarified certain discrete issues under the OLA." The earlier interim rule addressed discrete topics including the payment of similarly situated creditors, the honoring of personal services contracts, the recognition of contingent claims, the treatment of any remaining shareholder value in the case of a covered financial company that is a subsidiary of an insurance company, and limitations on liens that the FDIC may take on the assets of a covered financial company that is an insurance company or covered subsidiary.)

The Proposed Rule addresses the following issues: (1) the definition of a "financial company" subject to resolution under Title II by establishing criteria for determining whether a company is "predominantly engaged in activities that are financial in nature or incidental thereto;" (2) recoupment of compensation from senior executives and directors, including the placement of the burden of proof on such individuals to exonerate themselves; (3) application of the power to avoid fraudulent or preferential transfers; (4) the priorities of expenses and unsecured claims; and (5) the administrative process for initial determination of claims and the process for judicial determination of claims disallowed by the receiver.

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