[Federal Register Volume 64, Number 182 (Tuesday, September 21, 1999)]
[Proposed Rules]
[Pages 51084-51087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24541]


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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 340

RIN 3064-AB37


Restrictions on the Purchase of Assets From the Federal Deposit 
Insurance Corporation

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is proposing 
to issue a rule implementing the requirements of the Resolution Trust 
Corporation Completion Act of 1993 that assets held by the FDIC in the 
course of liquidating any federally insured institution not be sold to 
persons who, in ways specified in the Act, contributed to the demise of 
an insured institution. The proposed rule establishes a self-
certification process that is a prerequisite to the purchase of assets 
from the FDIC and provides definitions that effectuate the intent of 
Congress regarding the scope of the statutory prohibitions.

DATES: Written comments must be received on or before December 20, 
1999.

ADDRESSES: Written comments should be addressed to Robert E. Feldman, 
Executive Secretary, Attention: Comments/OES, Federal Deposit Insurance 
Corporation, 550 17th St., N.W., Washington, D.C. 20429.

[[Page 51085]]

Comments may be hand-delivered to the guard station at the rear of the 
550 17th Street Building (located on F street), between the hours of 
7:00 a.m. and 5:00 p.m. on business days. (Fax number (202) 898-3838; 
Internet: [email protected]). Comments will be available for inspection 
and photocopying in 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: Steven K. Trout, Senior Resolutions 
Specialist, Division of Resolutions and Receiverships, 202-898-3758, or 
Elizabeth Falloon, Counsel, Legal Division, 202-736-0725, Federal 
Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 
20429. These are not toll-free numbers.

SUPPLEMENTARY INFORMATION:

Background

    Section 20 of the Resolution Trust Corporation Completion Act of 
1993 (RTCCA or Act) amends section 11(p) of the Federal Deposit 
Insurance Act (FDI Act) by adding a provision that restricts the class 
of persons eligible to purchase assets held by the FDIC in the course 
of liquidating depository institutions. The Act amended the FDI Act by 
requiring the FDIC to promulgate regulations which, at a minimum, 
prohibit the sale of an asset of a failed financial institution to 
certain individuals or entities who may have contributed to the demise 
of that institution and prohibit the sale of an asset using FDIC 
financing to persons who have defaulted and engaged in fraudulent 
activities with respect to a loan from the institution. The FDIC has 
adopted policies beginning in 1991 that addressed various statutory 
goals as well as other policy concerns. The proposed regulation will 
meet the requirements of the statute, and the FDIC will continue to 
have other policies regarding purchaser eligibility, such as policies 
regarding purchase by individuals and entities who are delinquent in 
payment of obligations to the FDIC and purchase by FDIC contractors.
    The FDIC's implementation of the requirements of the statute 
expands upon the minimum established by statute in several respects. 
Under the regulation, prospective purchasers will be restricted from 
buying assets from failed financial institutions for which the FDIC is 
conservator or receiver in the following circumstances:
    Under Sec. 340.3 of the proposed regulation, if a person or entity 
(or its associated person, as that term is defined) has defaulted on 
obligations owed to failed financial institutions and the FDIC that 
aggregate over $1 million, and made fraudulent misrepresentations in 
connection with any one of those obligations, such a person or entity 
is prohibited from purchasing any assets of failed financial 
institutions using FDIC financing. Although the statute would restrict 
only the sale of assets from the failed financial institution that held 
the defaulted obligation of the proposed purchaser, restrictions 
contained in the regulation apply regardless of which failed 
institution's assets are being sold. Because assets are passed through 
various institutions from time to time before and after the 
institutions are placed in receivership and are sometimes acquired from 
institutions in their corporate capacity, it can be difficult to 
ascertain which institution may have sustained a loss associated with a 
particular asset, or which institution held the asset in question at 
various points in time. Also, assets are sometimes sold in bulk, 
combining assets from several failed financial institutions. These 
factors would make it cumbersome to limit the restriction to the assets 
of the particular institution that incurred the loss. Moreover, the 
FDIC believes adopting this more stringent approach is consistent with 
the Act as the statute sets only the minimum standards that the FDIC 
must set in its rule.
    Section 340.4(a)(1) of the regulation provides that if a person 
participated as an officer or director of a failed financial 
institution or of a related entity in a material way in one or more 
transactions that resulted in a substantial (i.e., greater than 
$50,000) loss to that failed financial institution, the person would 
not, using any source of payment or financing (i.e., whether or not the 
FDIC provides financing), be permitted to purchase an asset of any 
failed institution from the FDIC. The proposed rule establishes 
parameters to determine whether a person or entity has ``participated 
in a material way in a transaction that caused a substantial loss to a 
failed institution'', as this phrase is not defined in the statute. 
This definition includes anyone who has been found by a court or 
tribunal (or, in certain circumstances, has been alleged in formal 
legal proceedings) in connection with a substantial loss to a failed 
institution to have (i) violated any federal banking laws or to have 
breached a written agreement with a federal banking agency or with the 
failed financial institution; (ii) engaged in an unsafe or unsound 
practice in conducting the affairs of the failed institution; or (iii) 
breached a fiduciary duty to the failed institution.
    Under Sec. 340.4(a)(2), if a person has, by federal regulatory 
action, been removed from or barred from participating in the affairs 
of any failed financial institution, the person would not, using any 
source of payment or financing, be permitted to purchase an asset of 
any failed financial institution from the FDIC.
    Under Sec. 340.4(a)(3), if a person or related entity has 
demonstrated a pattern or practice of defalcation, as defined in the 
proposed rule, regarding an obligation to a failed financial 
institution, the person would be barred from purchasing any asset or 
assets of any failed institution from the FDIC, regardless of the 
intended source of financing or payment. The definition of ``pattern or 
practice of defalcation'' requires more than one incident involving 
either intent or reckless disregard for whether a loss was caused and 
requires that the resulting loss be ``substantial''.
    Finally, under Sec. 340.4(a)(4), no person who has defaulted on an 
obligation to a failed institution and has been convicted of 
committing, or conspiring to commit, any offense under section 215, 
656, 657, 1005, 1006, 1007, 1014, 1032, 1341, 1343 or 1344 of Title 18 
of the United States Code (having generally to do with financial 
crimes, fraud and embezzlement) affecting any failed institution will 
be permitted to purchase any asset of any failed institution from the 
FDIC.
    In promulgating this regulation, the FDIC does not intend to imply 
that it will provide seller financing in connection with any asset 
sales nor that, if it determines to provide seller financing, it will 
do so to a person who does not meet other criteria, such as 
creditworthiness, as the FDIC may lawfully impose. Further, the FDIC 
expressly reserves its authority to promulgate other policies and rules 
restricting purchaser eligibility to buy assets from the FDIC.
    The proposed rule provides for implementation of the restrictions 
set forth above through a self-certification process. All purchasers of 
assets covered by the regulation, other than federal, state and local 
governmental agencies and instrumentalities and government-sponsored 
entities such as Government National Mortgage Association, Fannie Mae 
and Freddie Mac, will be required to execute a Purchaser Eligibility 
Certification in the form established by the FDIC. Because of the 
nature of these entities, including their organizational purposes or 
goals and the fact that they are subject to strict

[[Page 51086]]

governmental control or oversight, it is reasonable to presume 
compliance without requiring self-certification. However, authority is 
given to the Director of the FDIC's Division of Resolutions and 
Receiverships, or his designee, to require a certification from any of 
these entities if facts exist that suggest that such a prospective 
purchaser would fall within the restricted categories. Comment is 
expressly sought about the nature and scope of this aspect of the 
certification requirement.
    The prohibitions do not apply to a sale or transfer of assets that 
is part of a workout or settlement of obligations to a failed 
institution.

Paperwork Reduction Act

    As indicated by Sec. 340.7 of the proposed rule, the FDIC intends 
to develop a purchaser eligibility certification relating to this rule. 
If the certification is covered by the Paperwork Reduction Act, the 
FDIC will publish Federal Register notices and make submissions to the 
Office of Management and Budget consistent with the requirements of 5 
CFR 1320.10.

Regulatory Flexibility Act

    The only burden imposed by this regulation is the completion of a 
certification form described above in the Paperwork Reduction Act 
section. The burden produced by this requirement does not require the 
use of professional skills or the preparation of special reports or 
records and has a minimal impact, economic and time-wise, on those 
individuals and entities that seek to purchase assets from the FDIC. 
Moreover, this minimal burden is imposed only on those entities 
voluntarily seeking to purchase assets from the FDIC. Accordingly, the 
Board hereby certifies that the proposed rule would not have a 
significant economic impact on a substantial number of small entities 
within the meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.). The provisions of the Regulatory Flexibility Act relating to an 
initial and final regulatory flexibility analysis (5 U.S.C. 603 and 
604) are not applicable.

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 340

    Asset disposition, Banks, banking.

    For the reasons set out in the preamble, the FDIC hereby proposes 
to amend chapter III of title 12 of the Code of Federal Regulations by 
adding a new part 340 as follows:

PART 340--RESTRICTIONS ON SALE OF ASSETS BY THE FEDERAL DEPOSIT 
INSURANCE CORPORATION

Sec.
340.1  Authority, purpose, scope and preservation of existing 
authority.
340.2  Definitions.
340.3  Restrictions on the sale of assets by the FDIC in conjunction 
with a loan or extension of credit.
340.4  Restrictions on the sale of assets by the FDIC regardless of 
the method of financing.
340.5  Independent determination of eligibility for seller 
financing.
340.6  Certain asset sales unaffected by this part.
340.7  Certification required.
340.8  Workout, resolution, or settlement of obligations.

    Authority: 12 U.S.C. 1819 (Tenth), 1821(p).

Sec. 340.1  Authority, purpose, scope and preservation of existing 
authority.

    (a) Authority. This part is issued by the Federal Deposit Insurance 
Corporation (FDIC) pursuant to section 11(p) of the Federal Deposit 
Insurance Act (FDI Act), 12 U.S.C. 1821(p), as added by section 20 of 
the Resolution Trust Corporation Completion Act (Pub. L. 103-204, 107 
Stat. 2369 (1993).
    (b) Purpose. The sale by the FDIC of assets of any failed financial 
institution to certain persons who profited or engaged in wrongdoing at 
the expense of an insured institution, or seriously mismanaged an 
insured institution, is prohibited.
    (c) Scope. The restrictions of this part generally apply to assets 
owned or controlled by the FDIC in any capacity, even though the assets 
are not owned by the insured institution that the prospective purchaser 
injured. Unless the FDIC determines otherwise, this part shall not 
apply to the sale of securities in connection with the investment of 
corporate and receivership funds pursuant to the Investment Policy for 
Liquidation Funds managed by the FDIC as the same shall be in effect 
from time to time. These restrictions shall not apply to any sale by a 
trust or other entity of securities backed by a pool of assets that may 
include assets of failed institutions to a purchaser other than the 
underwriter purchasing in an initial offering.
    (d) Preservation of existing authority. Neither section 11(p) of 
the FDI Act nor this part in any way limits the authority of the FDIC 
to establish policies prohibiting the sale of assets to prospective 
purchasers who have injured any FDIC-insured institution or to other 
prospective purchasers, such as certain employees or contractors of the 
FDIC, or individuals who are not in compliance with the terms of any 
debt or duty owed to the FDIC. Any such policies may be independent of, 
in conjunction with, or in addition to the restrictions set forth in 
this part.


Sec. 340.2  Definitions.

    (a) Associated person of an entity or individual shall mean:
    (1) With respect to an individual:
    (i) That individual's spouse or dependent child or any member of 
that individual's immediate household;
    (ii) A partnership of which that individual is or was a general or 
limited partner; or
    (iii) A corporation of which that individual is or was an officer 
or director;
    (2) With respect to a partnership, a managing or general partner of 
the partnership; or
    (3) With respect to any entity, 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.
    (b) Default shall mean any failure to comply with the terms of an 
obligation to such an extent that:
    (1) A judgment has been rendered in favor of the FDIC or a failed 
institution; or (2) In the case of a secured obligation, the property 
securing such obligation is foreclosed on.
    (c) FDIC shall mean the Federal Deposit Insurance Corporation.
    (d) Failed institution shall mean any bank or savings association 
that has been under the conservatorship or receivership of the FDIC or 
RTC. For the purpose of this part, ``failed institution'' shall be 
deemed to include any entity owned and controlled by a failed 
institution.
    (e) Obligation shall mean any debt or duty to pay money owed to the 
FDIC or a failed institution, including any guarantee of any such debt 
or duty.
    (f) Person shall mean an individual, or an entity with a legally 
independent existence, including, without limitation, a trustee; the 
beneficiary of at least a 25 percent share of the proceeds of a trust; 
a partnership; a corporation; an association; or other organization or 
society.
    (g) RTC shall mean the former Resolution Trust Corporation.
    (h) Substantial loss shall mean:

[[Page 51087]]

    (1) An obligation that is delinquent for ninety (90) or more days 
and on which there remains an outstanding balance of more than $50,000;
    (2) An unpaid final judgment in excess of $50,000 regardless of 
whether it becomes forgiven in whole or in part in a bankruptcy 
proceeding;
    (3) 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;
    (4) Any loss in excess of $50,000 evidenced by an IRS Form 1099-C 
(Information Reporting for Discharge of Indebtedness).


Sec. 340.3  Restrictions on the sale of assets by the FDIC in 
conjunction with a loan or extension of credit.

    A person shall not, in purchasing one or more assets from the FDIC 
or any failed institution, receive a loan, advance, or other extension 
of credit from the FDIC or any failed institution, if:
    (a) There has been a default with respect to one or more 
obligations totaling in excess of $1,000,000 owed by that person or its 
associated person; and
    (b) Such person or its associated person shall have made any 
fraudulent misrepresentations in connection with any such 
obligation(s).


Sec. 340.4  Restrictions on the sale of assets by the FDIC regardless 
of the method of financing.

    (a) No person may acquire any assets from the FDIC or from any 
failed institution if the person or its associated person:
    (1) Has participated, as an officer or director of a failed 
institution or of an affiliate of a failed institution, in a material 
way in one or more transaction(s) that caused a substantial loss to 
that failed institution;
    (2) Has been removed from, or prohibited from participating in the 
affairs of, a failed institution, pursuant to any final enforcement 
action by the Office of the Comptroller of the Currency, the Office of 
Thrift Supervision, the Board of Governors of the Federal Reserve 
System, the FDIC, or the successors of any of them;
    (3) Has demonstrated a pattern or practice of defalcation regarding 
obligations to any failed institution; or
    (4) Has been convicted of committing or conspiring to commit any 
offense under section 215, 656, 657, 1005, 1006, 1007, 1014, 1032, 
1341, 1343 or 1344 of title 18 of the United States Code affecting any 
failed institution and there has been a default with respect to one or 
more obligations owed by that person or its associated person.
    (b) For purposes of paragraph (a) of this section, a person has 
participated ``in a material way in a transaction that caused a 
substantial loss to a failed institution'' if, in connection with a 
substantial loss to a failed institution, the person has been found in 
a final determination by a court or administrative tribunal, or is 
alleged in a judicial or administrative action brought by the FDIC or 
by any component of the government of the United States or of any 
state:
    (1) To have violated any law, regulation, or order issued by a 
federal or state banking agency, or breached or defaulted on a written 
agreement with a federal or state banking agency, or breached a written 
agreement with a failed institution;
    (2) To have engaged in an unsafe or unsound practice in conducting 
the affairs of a failed institution; or
    (3) To have breached a fiduciary duty owed to a failed institution.
    (c) For purposes of paragraph (a) of this section, a person or its 
associated person shall have demonstrated a pattern or practice of 
defalcations regarding obligations to a failed institution if the 
person or associated person has engaged in the following:
    (1) The person or associated person has engaged in more than one 
transaction which created an obligation on the part of such person or 
its associated person with intent to cause a loss to any financial 
institution insured by the FDIC or with reckless disregard for whether 
such transactions would cause a loss to any such insured financial 
institution; and
    (2) Such transactions, in the aggregate, caused a substantial loss 
to one or more failed institution(s).


Sec. 340.5  Independent determination of eligibility for seller 
financing.

    The absence of any disqualification under the restrictions set 
forth in this part does not create any right to obtain a loan or 
advance by or through the FDIC or remove the right of the FDIC to make 
an independent determination, based upon all relevant facts of the 
offeror's financial condition and history, of the offeror's eligibility 
to receive any such loan or advance.


Sec. 340.6  Certain asset sales unaffected by this part.

    The effectiveness of this part shall not affect the enforceability 
of a contract of sale and/or agreement for seller financing in effect 
prior to [insert effective date of final rule].


Sec. 340.7  Certification required.

    (a) Except as provided in paragraph (b) of this section, no person 
shall purchase any asset from the FDIC, unless that person shall have 
certified, under penalty of perjury with notice that a false 
certification may lead to punishment under 18 U.S.C. 1001, 1007, 1014 
and 1621, in such form as may be established by the FDIC, that none of 
the restrictions contained in this part applies to such purchase.
    (b) Notwithstanding paragraph (a) of this section, no certification 
shall be required of a state or political subdivision thereof, a 
federal agency or instrumentality, the Government National Mortgage 
Association, Fannie Mae, or Freddie Mac; provided however, that the 
Director of the FDIC's Division of Resolutions and Receiverships, or 
his designee, may, in his discretion, require a certification of any 
such entity.


Sec. 340.8  Workout, resolution, or settlement of obligations.

    The restrictions of Secs. 340.3 and 340.4 shall not apply if the 
sale or transfer of an asset resolves or settles, or is part of the 
resolution or settlement of, one or more obligations, regardless of the 
amount of such obligations.

    By Order of the Board of Directors.

    Dated at Washington, D.C. this 31st day of August, 1999.

Federal Deposit Insurance Corporation.
James D. LaPierre,
Deputy Executive Secretary.
[FR Doc. 99-24541 Filed 9-20-99; 8:45 am]
BILLING CODE 6714-01-P