Banking and Finance Law Daily Wrap Up, DODD-FRANK ACT—Entities must self-certify before purchasing assets of covered financial companies, (Apr 9, 2014)

By Lisa M. Goolik, J.D.

The Federal Deposit Insurance Corporation has adopted a final rule that prohibits individuals or entities that have, or may have, contributed to the failure of a "covered financial company" from purchasing a covered financial company's assets from the FDIC. Individuals and entities will be required to undertake a self-certification process prior to purchasing of assets of a covered financial company from the FDIC. The final rule takes effect July 1, 2014.

Dodd-Frank requirements. Section 210(r) of the Dodd-Frank Act prohibits certain sales of assets held by the FDIC in the course of liquidating a covered financial company and directs the FDIC to promulgate and implement regulations accordingly. The requirement was derived from section 11(p) of the Federal Deposit Insurance Act, which imposes similar restrictions on sales of assets of failed insured depository institutions by the FDIC; however, section 210(r) applies only to sales of covered financial company assets. Due to their similarities, the FDIC’s final rule is modeled substantially after the FDIC's regulation, Restrictions on the Sale of Assets by the Federal Deposit Insurance Corporation (12 C.F.R. Part 340), which implements section 11(p).

However, the Dodd-Frank Act restricts only the sale of assets of the covered financial company that held the defaulted obligation of the prospective purchaser, while the restrictions in the final rule apply regardless of which covered financial company's assets are being sold. The FDIC believes that its approach is consistent because the statute sets only the minimum standards that the FDIC must meet with implementation of the final rule.

Restrictions on the sale of assets. The final rule provides that person may not acquire any assets of a covered financial company from the FDIC if, prior to the appointment of the FDIC as receiver for the covered financial company, the person or its associated person:

1. has participated as an officer or director of a covered financial company or of an affiliate of a covered financial company in a material way in one or more transactions that caused a substantial loss to a covered financial company;

2. has been removed from, or prohibited from participating in the affairs of, a financial company pursuant to any final enforcement action by its primary financial regulatory agency;

3. has demonstrated a pattern or practice of defalcation regarding obligations to a covered financial company;

4. has been convicted of committing or conspiring to commit certain offenses having generally to do with financial crimes, fraud, and embezzlement affecting any covered financial company, and there has been a default with respect to one or more obligations owed by that person or its associated person; or

5. would be prohibited from purchasing the assets of a failed insured depository institution from the FDIC under Federal Deposit Insurance Act or its implementing regulation.

The restriction applies to the sale of assets of a covered financial company by the FDIC as receiver or in its corporate capacity. The restriction also applies to the sale of assets of a bridge financial company, if the sale is not in the ordinary course of business of the bridge financial company and the approval or non-objection of the FDIC is required in connection with the sale according to the charter, articles of association, bylaws, or other documents establishing the governance of the bridge financial company and the authorities of its board of directors and executive officers.

Additional restrictions for seller financing. The final rule also provides that a person may not borrow money or accept credit from the FDIC in connection with the purchase of any assets from the FDIC or any covered financial company if:

1. there has been a default with respect to one or more obligations totaling in excess of $1 million owed by that person or its associated person; and

2. the person or its associated person made any fraudulent misrepresentations in connection with any obligations.

Definitions. The term “associated person” is broadly defined to include immediate family members, partnerships and corporations of which an individual is or was an officer or director. For partnerships, “associated person” includes a managing or general partner of the partnership or, with respect to a limited liability company, a manager. For any other entity, the definition includes an individual or entity who, acting individually or in concert with one or more individuals or entities, owns or controls 25 percent or more of the entity.

The term "substantial loss" means: (a) an obligation that is delinquent for 90 or more days for which there remains an outstanding balance of more than $50,000; (b) an unpaid final judgment in excess of $50,000, regardless of whether it becomes forgiven in whole or in part in a bankruptcy proceeding; (c) a deficiency balance following a foreclosure of collateral in excess of $50,000, regardless of whether it becomes forgiven in whole or in part in a bankruptcy proceeding; or (d) any loss in excess of $50,000 evidenced by an IRS Form 1099-C (Information Reporting for Cancellation of Debt).

Self-certification. The final rule includes a self-certification process prior to purchasing any asset of a covered financial company from the FDIC. The person must certify, under penalty of perjury, that none of the restrictions contained within the final rule applies to the purchase and that neither the identity nor form of the person, nor any aspect of the contemplated transaction, has been created or altered with the intent, in whole or in part, to allow an individual or entity who otherwise would be ineligible to purchase assets from the FDIC to benefit directly or indirectly from the proposed transaction.

States or political subdivisions of a state, federal agencies or instrumentalities, government-sponsored enterprises, and bridge financial companies do not need to provide the self-certification, unless otherwise required by the Director of the FDIC's Division of Resolutions and Receiverships.

Exceptions. Under the final rule, the restriction does not apply to:

1. a sale of a security or a group or index of securities, a commodity, or any qualified financial contract that customarily is traded through a financial intermediary, where the seller cannot control selection of the purchaser and the sale is consummated through that customary practice;

2. a judicial sale or a trustee's sale of property that secures an obligation to the FDIC where the sale is not conducted or controlled by the FDIC; or

3. the sale or transfer of an asset if the sale or transfer resolves or settles, or is part of the resolution or settlement of, one or more claims or obligations that have been, or could have been, asserted by the FDIC against the person with whom the FDIC is settling, regardless of the amount of the claims or obligations.

In addition, in the case of a sale of securities backed by a pool of assets that may include assets of a covered financial company by a trust or other entity, the restriction applies only to the sale of assets by the FDIC to an underwriter in an initial offering, and not to any other purchaser of the securities.

RegulatoryActivity: BankingOperations DepositInsurance DoddFrankAct Receiverships