[Federal Register Volume 64, Number 174 (Thursday, September 9, 1999)]
[Proposed Rules]
[Pages 48968-48970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23384]


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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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  Federal Register / Vol. 64, No. 174 / Thursday, September 9, 1999 / 
Proposed Rules  

[[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: 
[email protected]]. 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

[[Page 48969]]

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