[Federal Register Volume 75, Number 131 (Friday, July 9, 2010)]
[Proposed Rules]
[Pages 39462-39472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-16723]


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FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1237

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight

12 CFR Part 1777

RIN 2590-AA23


Conservatorship and Receivership

AGENCY: Federal Housing Finance Agency; Office of Federal Housing 
Enterprise Oversight.

ACTION: Notice of proposed rulemaking; request for comment.

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SUMMARY: The Federal Housing Finance Agency (FHFA) is proposing a 
regulation to establish a framework for conservatorship and 
receivership operations for the Federal National Mortgage Association, 
the Federal Home Loan Mortgage Corporation, and the Federal Home Loan 
Banks, as contemplated by the Housing and Economic Recovery Act of 2008 
(HERA). HERA amended the Federal Housing Enterprises Financial Safety 
and Soundness Act of 1992 (Safety and Soundness Act) by adding, among 
other provisions, section 1367, Authority Over Critically 
Undercapitalized Regulated Entities. The proposed rule will implement 
this provision, and is designed to ensure that these operations advance 
FHFA's critical safety and soundness and mission requirements. As 
proposed, the rule seeks to protect the public interest in the 
transparency of conservatorship and receivership operations for the 
Federal National Mortgage Association (Fannie Mae), the Federal Home 
Loan Mortgage Corporation (Freddie Mac) (collectively, the 
Enterprises), and the Federal Home Loan Banks (Banks) (collectively, 
the regulated entities).

DATES: Comments on the proposed rule must be received in writing on or 
before September 7, 2010.

ADDRESSES: You may submit your comments on the proposed regulation, 
identified by regulatory identifier number (RIN) 2590-AA23, by any one 
of the following methods:
     E-mail: Comments to Alfred M. Pollard, General Counsel, 
may be sent by e-mail at [email protected]. Please include ``RIN 
2590-AA23'' in the subject line of the message.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments. If you submit your 
comment to the Federal eRulemaking Portal, please also send it by e-
mail to FHFA at [email protected] to ensure timely receipt by the 
Agency. Please include ``RIN 2590-AA23'' in the subject line of the 
message.
     Hand Delivered/Courier: The hand delivery address is: 
Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA23, 
Federal Housing Finance Agency, Fourth Floor, 1700 G Street, NW., 
Washington, DC 20552. The package should be logged at the Guard Desk, 
First Floor, on business days between 9 a.m. and 5 p.m.
     U.S. Mail, United Parcel Service, Federal Express, or 
Other Mail Service: The mailing address for comments is: Alfred M. 
Pollard, General Counsel, Attention: Comments/RIN 2590-AA23, Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552.

FOR FURTHER INFORMATION CONTACT: Frank Wright, Senior Counsel, Federal 
Housing Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, 
DC 20552, (202) 414-6439 (not a toll-free number). The telephone number 
for the Telecommunications Device for the Deaf is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Comments

    FHFA invites comments on all aspects of the proposed regulation and 
will take all comments into consideration before issuing a final 
regulation. Copies of all comments will be posted on the Internet Web 
site at https://www.fhfa.gov. In addition, copies of all comments 
received will be available for examination by the public on business 
days between the hours of 10 a.m. and 3 p.m., at the Federal Housing 
Finance Agency, Fourth Floor, 1700 G Street, NW., Washington, DC 20552. 
To make an appointment to inspect comments, please call the Office of 
General Counsel at (202) 414-6924.

II. Background

    The Housing and Economic Recovery Act of 2008 (HERA), Public Law 
110-289, 122 Stat. 2654, amended the Federal Housing Enterprises 
Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501 et seq.) 
(Safety and Soundness Act), and the Federal Home Loan Bank Act (12 
U.S.C. 1421-1449) to establish FHFA as an independent agency of the 
Federal Government.\1\ FHFA was established as an

[[Page 39463]]

independent agency of the Federal Government with all of the 
authorities necessary to oversee vital components of our country's 
secondary mortgage markets--the regulated entities and the Office of 
Finance of the Federal Home Loan Bank System.
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    \1\ See Division A, titled the ``Federal Housing Finance 
Regulatory Reform Act of 2008,'' Title I, Section 1101 of HERA.
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    The Safety and Soundness Act provides that FHFA is headed by a 
Director with general supervisory and regulatory authority over the 
regulated entities and over the Office of Finance,\2\ expressly to 
ensure that the regulated entities operate in a safe and sound manner, 
including maintaining adequate capital and internal controls; foster 
liquid, efficient, competitive, and resilient national housing finance 
markets; comply with the Safety and Soundness Act and rules, 
regulations, guidelines, and orders issued under the Safety and 
Soundness Act and the authorizing statutes (i.e., the charter acts of 
the Enterprises and authorizing statutes of the Banks); and carry out 
their respective missions through activities and operations that are 
authorized and consistent with the Safety and Soundness Act, their 
respective charter acts, authorizing statutes, and the public 
interest.\3\
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    \2\ See sections 1101 and 1102 of HERA, amending sections 1311 
and 1312 of the Safety and Soundness Act, codified at 12 U.S.C. 4511 
and 4512.
    \3\ See 12 U.S.C. 4513(a)(1)(B).
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    In addition, this law combined the staffs of the now abolished 
Office of Federal Housing Enterprise Oversight (OFHEO), the now 
abolished Federal Housing Finance Board (FHFB), and the Government-
Sponsored Enterprise (GSE) mission office at the Department of Housing 
and Urban Development (HUD). By pooling the expertise of the staffs of 
OFHEO, FHFB, and the GSE mission staff at HUD, Congress intended to 
strengthen the regulatory and supervisory oversight of the 14 housing-
related GSEs.
    The Enterprises, combined, own or guarantee nearly $5.5 trillion of 
residential mortgages in the United States (U.S.), and play a key role 
in housing finance and the U.S. economy. The Banks, with combined 
assets of $965.7 billion, support the housing market by making advances 
(i.e., loans secured by acceptable collateral) to their member 
commercial banks, thrifts, and credit unions, assuring a ready flow of 
mortgage funding.
    Because the Agency's mission is to promote housing and a strong 
national housing finance system by ensuring the safety and soundness of 
the Enterprises and the Banks, HERA amended the Safety and Soundness 
Act to make explicit FHFA's general regulatory and supervisory 
authority. To this end, section 1311(b)(1) of the Safety and Soundness 
Act expressly makes each regulated entity ``subject to the supervision 
and regulation of the Agency,'' thus amplifying the broad supervisory 
authority of the Director. See 12 U.S.C. 4511(b)(1). Moreover, the 
Safety and Soundness Act underscores the breadth of this authority by 
expressly conveying ``general regulatory authority'' over the regulated 
entities to the Director. See 12 U.S.C. 4511(b)(2); see also 12 U.S.C. 
4513(a)(1)(B).\4\ In addition, the Safety and Soundness Act, as amended 
by HERA, provides that ``[t]he Agency may prescribe such regulations as 
the Agency determines to be appropriate regarding the conduct of 
conservatorships or receiverships.'' 12 U.S.C. 4617(b)(1).
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    \4\ Moreover, other provisions in the Safety and Soundness Act 
recognize the independence and general regulatory authority of the 
Director. Section 1311(c) of the Safety and Soundness Act provides 
that the authority of the Director ``to take actions under subtitles 
B and C [of Title I of HERA] shall not in any way limit the general 
supervisory and regulatory authority granted to the Director under 
subsection (b).'' See 12 U.S.C. 4511(c). Similarly, section 1319G(a) 
of the Safety and Soundness Act provides ample, independent 
authority for the issuance of ``any regulations, guidelines, or 
orders necessary to carry out the duties of the Director under this 
title or the authorizing statutes, and to ensure that the purposes 
of this title and the authorizing statutes are accomplished.'' See 
12 U.S.C. 4519G(a).
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    The Enterprises are currently in conservatorship. FHFA as 
Conservator has been responsible for the conduct and administration of 
all aspects of the operations, business, and affairs of both 
Enterprises since September 6, 2008, the date on which the Director 
placed Fannie Mae and Freddie Mac in conservatorship. As Conservator, 
FHFA is charged with taking such action as may be ``necessary to put 
the regulated entity in a sound and solvent condition'' and 
``appropriate to carry on the business of the regulated entity and 
preserve and conserve the assets and property of the regulated 
entity.'' 12 U.S.C. 4617(b)(2)(D). Similarly, FHFA, as Conservator, may 
``transfer or sell any asset or liability of the regulated entity in 
default, and may do so without any approval, assignment, or consent 
with respect to such transfer or sale.'' Id. 4617(b)(2)(G).
    The United States Department of the Treasury (``Treasury'') 
facilitated FHFA's decision to utilize its statutory conservatorship 
powers in an effort to restore the Enterprises' financial health by 
agreeing to make available hundreds of billions of taxpayers' dollars 
to be used by the Enterprises pursuant to Senior Preferred Stock 
Purchase Agreements (``Treasury Agreements'').\5\ Pursuant to these 
Agreements, as subsequently amended, Treasury has made available, 
through the Conservator, capital (``Treasury Commitments'') to each of 
the Enterprises in return for senior preferred stock carrying a 
preference with regard to dividends and the distribution of assets of 
the Enterprise in liquidation. As Conservator, FHFA has already drawn 
on the Treasury Commitments several times to prevent a negative net 
worth position that would trigger mandatory receivership of each 
Enterprise.
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    \5\ The Treasury Agreements and their amendments are available 
to the public for review at http://www.fhfa.gov/webfiles/1099/conservatorship21709.pdf and http://www.financialstability.gov/roadtostability/homeowner.html.
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    Congress authorized the Treasury Agreements in section 1117 of 
HERA, which amended each of the Enterprises' authorizing statutes 
(Fannie Mae, 12 U.S.C. 1716 et seq.; Freddie Mac, 12 U.S.C. 1451 et 
seq.) to empower Treasury to purchase securities of the Enterprises 
subject to certain conditions. These conditions include that Treasury 
``protect the taxpayers'' by taking into consideration, among other 
things, ``[t]he need for preferences or priorities regarding payments 
to the Government'' and ``[r]estrictions on the use of corporate 
resources.'' Pursuant to this statutory mandate, the Treasury 
Agreements imposed several such preferences, priorities, and 
restrictions. For instance, while the Treasury Agreements authorize the 
Conservator to draw on the Treasury Commitment for funds equal to the 
amount by which an Enterprise's liabilities exceed its assets, excluded 
from this calculation are liabilities that the Conservator determines 
shall be subordinated, including ``a claim against [an Enterprise] 
arising from rescission of a purchase or sale of a security issued by 
[an Enterprise] * * * or for damages arising from the purchase, sale, 
or retention of such a security.'' Treasury Agreements Sec.  1, 
definition of ``Deficiency Amount,'' subparagraph (iii). In other 
words, the Conservator may determine to subordinate such a liability, 
with the effect that funds could not be drawn under the Treasury 
Agreements to satisfy it. The Treasury Agreements also contain 
restrictions on the declaration or payment of dividends or other 
distributions with respect to the Enterprises' equity interests; 
redeeming, purchasing, retiring, or otherwise acquiring for value any 
of the Enterprises' equity interests; or selling, transferring, or 
otherwise disposing of

[[Page 39464]]

all or any portion of the Enterprises' assets other than in the 
ordinary course of business or under other limited exceptions. Treasury 
Agreements Sec. Sec.  5.1 and 5.4. In promulgating these regulations, 
the Agency is required to ``ensure that the purposes of * * * the 
authorizing statutes,'' including the authorizing statutes' provisions 
for stock purchases by Treasury and the preferences, priorities, and 
restrictions attendant to such purchases, ``are accomplished.'' 12 
U.S.C. 4526(a).

 III. Synopsis of the Proposed Regulation

    Comments are requested on whether the proposed conservatorship and 
receivership regulation will provide clarity to the regulated entities, 
creditors, and the markets regarding the processes of conservatorship 
and receivership, and the relationship among various classes of 
creditors and equity-holders in the event of the appointment of a 
conservator or receiver. This proposed regulation is designed to 
describe, codify, and implement the changes to the statutory regime 
enacted by HERA, the authorities granted to FHFA, and to eliminate 
ambiguities regarding those changes. The proposed regulation is part of 
FHFA's implementation of the powers provided by HERA, and does not seek 
to anticipate or predict future conservatorships or receiverships.
    The proposed regulation includes provisions that describe the basic 
authorities of FHFA when acting as conservator or receiver, including 
the enforcement and repudiation of contracts. Reflecting the approach 
in HERA, the proposed regulation parallels many of the provisions in 
the Federal Deposit Insurance Corporation (FDIC) rules for 
receiverships and conservatorships. The proposed regulation necessarily 
differs in some respects, however, from the FDIC regulations, because 
the GSEs are not depository institutions, and their important public 
missions differ from those of banks and thrifts.
    The proposed regulation establishes procedures for conservators and 
receivers and priorities of claims for contract parties and other 
claimants. These priorities set forth the order in which various 
classes of claimants would be paid, partially or in full, in the event 
that a regulated entity would be unable to pay all valid claims. 
Conservatorship and receivership also raise complex issues regarding 
the types of contracts that should be repudiated or enforced and the 
circumstances under which such decisions are made, and these issues are 
addressed in the proposed regulation. The proposed regulation also 
recognizes and addresses the differences between the Banks and the 
Enterprises, where appropriate.
    Additionally, FHFA seeks comment on several provisions in the 
regulation that would address whether and to what extent claims against 
the regulated entities by current or former holders of their equity 
interests for rescission or damages arising from the purchase, sale, or 
retention of such equity interests will be paid while those entities 
are in conservatorship or receivership. The potential impact of such 
claims is significant and may jeopardize FHFA's ability to fulfill its 
statutory mission to restore soundness and solvency to insolvent 
regulated entities and to preserve and conserve their assets and 
property.
    The regulation would clarify that for purposes of priority 
determinations, claims arising from rescission of a purchase or sale of 
an equity security of a regulated entity, or for damages arising from 
the purchase, sale or retention of such a security, will be treated as 
would the underlying security to which the claim relates. In addition, 
the proposed regulation would classify a payment of these types of 
claims as a capital distribution, which would be prohibited during 
conservatorship, absent the express approval of the Director. Moreover, 
the regulation will provide that payment of Securities Litigation 
Claims will be held in abeyance during conservatorship, except as 
otherwise ordered by the Director. In the event of receivership, such 
claims will be treated according to the process established by statute 
and, if adopted, this proposed regulation.

IV. Summary of Conservatorship and Receivership Provisions of the 
Safety and Soundness Act

    The Safety and Soundness Act, as amended, provides the general 
circumstances for the discretionary appointment of a conservator or 
receiver. 12 U.S.C. 4617(a)(3). The Director has grounds for 
discretionary appointment of FHFA as a conservator or receiver if: (1) 
The assets of the regulated entity are less than the entity's 
obligations to its creditors and others; (2) the regulated entity has 
suffered substantial dissipation of its assets or earnings due to a 
violation of a provision of federal or state law or an unsafe or 
unsound practice; (3) the regulated entity is in an unsafe or unsound 
condition to transact business; (4) the regulated entity has committed 
a willful violation of a cease-and-desist order that has become final; 
(5) the regulated entity has concealed the books, papers, records, or 
assets of the regulated entity; (6) the regulated entity is unlikely to 
be able to pay its obligations or meet the demands of its creditors in 
the normal course of business; (7) the regulated entity has incurred or 
is likely to incur losses that will deplete all or substantially all of 
its capital; (8) a violation of law or unsafe or unsound practice by 
the regulated entity that is likely to cause insolvency, substantial 
dissipation of assets, earnings, or to weaken the condition of the 
regulated entity has occurred; or (9) the regulated entity consents to 
the appointment by resolution of its board of directors, its 
shareholders, or members. The Director may appoint FHFA as conservator 
or receiver if the regulated entity is critically undercapitalized, 
significantly undercapitalized, or undercapitalized and has no 
reasonable prospect of becoming adequately capitalized.
    The Safety and Soundness Act provides FHFA, as conservator or 
receiver, with all the rights, titles, powers, and privileges of the 
shareholders, directors, and officers of a regulated entity under 
conservatorship or receivership. 12 U.S.C. 4617(b)(2)(A). In addition, 
the conservator or receiver is provided a number of additional powers, 
including authority to: (1) Take over the assets of and operate the 
regulated entity; (2) collect all obligations and money due the 
regulated entity; (3) perform functions of the regulated entity 
consistent with appointment as conservator or receiver; and (4) 
preserve and conserve the assets and property of the regulated entity. 
id. 4617(b)(2)(B). The Safety and Soundness Act also provides FHFA with 
the power to avoid a fraudulent transfer of an interest to an entity-
affiliated party or debtor of the regulated entity that was made within 
five years of the date on which FHFA was appointed conservator or 
receiver. id. 4617(b)(15).
    Furthermore, the Safety and Soundness Act also provides the 
conservator with the power to take such action as may be necessary to 
put the regulated entity in a sound and solvent condition, appropriate 
to carry on the business of the regulated entity, and to preserve and 
conserve its assets and property. The Safety and Soundness Act also 
provides a receiver with the power to place a regulated entity in 
liquidation in such manner as FHFA deems appropriate. id. 
4617(b)(2)(E). As amended, the Safety and Soundness Act bestows upon a 
receiver the power to determine claims in the process of liquidation or 
winding up the affairs of a regulated entity, including the

[[Page 39465]]

allowance and disallowance of claims (12 U.S.C. 4617(b)(3)) and 
establishes the process and treatment for certain qualified financial 
contracts (12 U.S.C. 4617(d)(8)).

V. Section-by-Section Analysis of the Proposed Regulation

Section 1237.1 Purpose and Applicability

    This section explains that the provisions of this regulation would 
provide rules for the conduct of a conservator or receiver of a 
regulated entity.

Section 1237.2 Definitions

    This section would provide definitions of certain terms used in the 
regulation.

Section 1237.3 Powers of the Agency as Conservator or Receiver

    This section enumerates the powers of FHFA while acting as 
conservator or receiver for a regulated entity. This section states the 
powers of FHFA to continue the mission of a regulated entity in 
conservatorship or receivership as described by section 
1313(a)(1)(B)(ii) of the Safety and Soundness Act, and ensure that the 
operations of such regulated entity foster liquid, efficient, 
competitive, and resilient national housing finance markets.
    While in conservatorship, the Enterprises continue to operate under 
their charters, which provide that their purpose is to ``provide 
stability in the secondary market for residential mortgages,'' 
``respond appropriately to the private capital market,'' ``provide 
ongoing assistance to the secondary market for residential mortgages * 
* *, '' and ``promote access to mortgage credit throughout the Nation * 
* *'' (Fannie Mae Charter Act, section 301; Freddie Mac Corporation 
Act, section 301(b).) FHFA is obligated to regulate the Enterprises in 
conservatorship, as well as any Bank that should be placed into 
conservatorship, pursuant to FHFA's mandate that ``the operations of 
each regulated entity foster liquid, efficient, competitive, and 
resilient national housing finance markets (including activities 
relating to mortgages on housing for low- and moderate-income families 
involving a reasonable economic return that may be less than the return 
earned on other activities).'' Section 1313(a)(1)(B)(ii) of the Safety 
and Soundness Act. The proposed regulation carries forward those 
statutory mandates.
    A focus on mission is especially appropriate for the Enterprises, 
currently in conservatorship, for several reasons. First, they are 
supported by the Treasury, funded by the American taxpayer, with 
ongoing capital infusions that would not be available to the 
Enterprises in the private capital market on similar terms, or probably 
on any terms. Second, the Enterprises were supported for many years by 
the implicit federal guarantee, which enabled them to operate with 
thinner capital cushions than their risk profiles merited and hence to 
generate larger returns for private investors than would have been 
possible at more appropriate capital levels. Inseparable from that 
implicit guarantee is the public mission of the Enterprises, which they 
must continue to pursue now that the government has made good on that 
guarantee by sustaining the Enterprises with the financial support of 
the Treasury. And finally, the Enterprises' mission activity is 
necessary to preserve the value of their own businesses.
    The Enterprises are not only participants in the national mortgage 
market; they are significant drivers of its performance. As purchasers 
of roughly three out of four residential mortgages currently being 
originated, the Enterprises' mission activities, such as their 
participation in the administration's loan modification and refinancing 
program that may help stabilize the nation's home mortgage market, are 
critical to the Enterprises' own recovery of financial health.
    This section also states that FHFA, as conservator, has the broad 
power to take necessary action to put the regulated entity in sound and 
solvent condition and to take appropriate action to preserve and 
conserve the assets and property of a regulated entity.

Section 1237.4 Receivership Following Conservatorship; Administrative 
Expenses

    This section provides that the administrative expenses of a 
conservatorship shall also be deemed administrative expenses of a 
subsequent receivership if the receiver immediately succeeds the 
conservator.

Section 1237.5 Contracts Entered Into Before Appointment of a 
Conservator or Receiver

    The section provides that the conservator or receiver shall have 18 
months following its appointment to determine whether to exercise the 
rights of repudiation under 12 U.S.C. 4617(d). By statute, the 
determination of whether to exercise such rights should be made within 
a reasonable time following the appointment of the conservator and 
receiver. 12 U.S.C. 4617(d)(2). The experiences of FHFA during the 
conservatorships of Fannie Mae and Freddie Mac have shown that at least 
18 months is required for the conservator to obtain all facts needed to 
make accurate determinations about its rights of repudiation.

Section 1237.6 Authority To Enforce Contracts

    This section states the authority of a conservator or receiver to 
enforce contracts that the regulated entity has entered, even if such 
contracts contain provisions for termination or default upon the 
appointment of a conservator or receiver.

Section 1237.7 Period for Determination of Claims

    This section states the period and timing of the determination by 
FHFA as receiver of claims against a regulated entity.

Section 1237.8 Alternate Procedures for Determination of Claims

    This section allows claimants to seek alternative dispute 
resolution for determination of claims in lieu of a judicial 
determination. The procedure for alternative dispute resolution may be 
determined by orders, policy statements, and directives to be issued by 
FHFA, similar to the practices of the FDIC.

Section 1237.9 Priority of Expenses and Unsecured Claims

    This section discusses the priority of unsecured claims against a 
regulated entity in receivership, or the receiver for that regulated 
entity, that have been proven to the satisfaction of FHFA as receiver. 
The order of claims begins with administrative expenses of the receiver 
followed by other general or senior liabilities of the regulated 
entity, then by obligations subordinated to general creditors, and 
finally by obligations to shareholders or members. The receiver would 
also be required by this section to provide similar treatment to all 
similarly situated creditors. Some creditors may benefit from better 
treatment than others, because the government or an acquirer may choose 
to assume or guarantee certain liabilities, but not others. However, 
each creditor will receive at least what that creditor would have 
received in a full liquidation of the regulated entity.
    This section would also confirm that the lowest-priority category 
of claims in receivership, ``[a]ny obligation to shareholders or 
members arising as a result of their status as shareholders or 
members,'' refers to both current and former holders of equity 
interests and

[[Page 39466]]

includes any claim arising from rescission of a purchase or sale of an 
equity security of a regulated entity or for damages arising from the 
purchase, sale, or retention of such a security. The Safety and 
Soundness Act relegates claims by equity-holders to a lower priority 
than is reserved for claims by general creditors or subordinated 
creditors. 12 U.S.C. 4617(c)(1)(D). Indeed, the Safety and Soundness 
Act bars shareholder claims from the status of claims of general 
creditors (12 U.S.C. 4617(c)(1)(B)) or subordinated creditors (12 
U.S.C. 4617(c)(1)(C)). Claims for damages by shareholders could be 
considered to be creditor claims. But the statute specifically 
recognizes that shareholders may have claims arising from their status 
as shareholders that could be considered creditor claims and relegates 
them to the same status as other shareholder claims. The statute thus 
gives second priority to ``[a]ny * * * general or senior liability of 
the regulated entity (which is not a liability described under 
subparagraph (C) [subordinated creditor claims] or (D) [shareholder 
claims]'' (emphasis added)); and gives third priority to ``[a]ny 
obligation subordinated to general creditors (which is not an 
obligation described under subparagraph (D) [shareholder claims]). The 
statute relegates shareholder claims to fourth priority, including 
those claims that in other circumstances could be considered creditor 
claims.
    By permitting recovery by equity-holders only after creditors have 
been paid in full, section 1367(c) of the Safety and Soundness Act 
reflects the longstanding ``general rule of equity'' that 
``stockholders take last in the estate of a bankrupt corporation.'' 
Gaff v. FDIC, 919 F.2d 384, 392 (6th Cir. 1990); see also In re 
Stirling Homex Corp. (Jezarian v. Raichle), 579 F.2d 206, 211 (2d Cir. 
1978) (``[A]fter all creditors have been paid, provision may be made 
for stockholders. When the debtor is insolvent, the stockholders, as 
such, receive nothing.''). The rationale underlying this rule is that 
``[b]ecause, unlike creditors and depositors, stockholders stand to 
gain a share of corporate profits, stockholders should take the primary 
risk of the enterprise failing.'' Gaff, 919 F.2d at 392. Moreover, 
creditors deal with a corporation ``in reliance upon the protection and 
security provided by the money invested by the corporation's 
stockholders--the so-called `equity cushion.` '' Stirling Homex, 579 
F.2d at 214.
    These considerations apply not only to claims by equity-holders to 
share in the distribution of receivership assets directly by reason of 
their ownership of equity, but also to claims to compensate for having 
allegedly been defrauded into purchasing the equity. In either 
situation, the ownership of the equity security is a ``but-for'' 
element of the alleged entitlement to receivership assets and the claim 
arises out of that ownership. For any claim arising out of status as an 
equity-holder, it is fair and appropriate to base the claim's relative 
entitlement with respect to creditors to receive an allocation out of a 
limited fund on a comparison of the different types of risks equity-
holders and creditors assumed when they dealt with the corporation. As 
courts and commentators have explained, while both equity-holders and 
creditors of a corporation assume the risk of corporate insolvency, 
only equity-holders assume the risk of fraud in the issuance or sale of 
the equity securities they purchased, and to treat their fraud claims 
on par with general creditors would improperly shift some of that risk 
to general creditors. See In re Geneva Steel Co., 281 F.3d 1173, 1176-
77 (10th Cir. 2002) (citing John Slain & Homer Kripke, ``The Interface 
Between Securities Regulation and Bankruptcy[boxh]Allocating the Risk 
of Illegal Securities Issuance Between Securityholders and the Issuer's 
Creditors'', 48 N.Y.U. L. Rev. 261, 286-91 (1973)); In re Granite 
Partners, L.P., 208 B.R. 332, 336 (Bankr. S.D.N.Y. 1997).
    For these reasons, the subordination of Securities Litigation 
Claims to creditors is a cornerstone of the Bankruptcy Code, which 
governs the liquidation and reorganization of the vast majority of 
publicly traded American corporations. Specifically, section 510(b) of 
the Bankruptcy Code provides in pertinent part that ``a claim arising 
from rescission of a purchase or sale of a security of the debtor or of 
an affiliate of the debtor, [or] for damages arising from the purchase 
or sale of such a security * * * shall be subordinated to all claims or 
interests that are senior to or equal the claim or interest represented 
by such security, except that if such security is common stock, such 
claim has the same priority as common stock.'' This provision has been 
applied to Securities Litigation Claims in some of the largest and most 
storied corporate bankruptcies ever. See, e.g., In re Enron Corp., 341 
B.R. 141, 148-59 (Bankr. S.D.N.Y. 2006); In re WorldCom, Inc., 329 B.R. 
10, 11-16 (Bankr. S.D.N.Y. 2005).\6\
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    \6\ In the Enron and WorldCom bankruptcies, among others, these 
principles were applied to subordinate Securities Litigation Claims 
brought by holders of stock options who claimed that corporate fraud 
rendered their options worthless. See Enron, 341 B.R. at 163-69 
(option holders ``would `share' in the profits of the enterprise'' 
and options ``resemble a typical equity interest'' because ``the 
cash value of the options varied with the value of the Debtor's 
stock''); In re WorldCom, Inc., No. 02-13533 (AJG), 2006 WL 3782712, 
*6 (Bankr. S.D.N.Y. Dec. 21, 2006) (``That the asserted damages flow 
from changes in the debtor's share price is obvious evidence that 
the claim represents the equity interest of a security holder and 
should be subordinated.'' (internal quotation marks and alterations 
omitted).
     By defining ``equity security'' to include options to purchase 
or sell equity interests of a regulated entity, this proposed 
regulation would likewise subordinate Securities Litigation Claims 
based on options. As discussed in Enron and Worldcom, the policy 
considerations justifying subordination of shareholder claims, such 
as allocating the consequences of insolvency between equity-holders 
and creditors based on the risk profile for which they originally 
bargained, apply with equal, if not greater, force to claims based 
on options, which are purely derivative of the underlying shares. 
For example, a purchaser of a call option (a right to purchase stock 
at a specified price during a certain period) assumes at least as 
much risk as a purchaser of the underlying stock. Not only does the 
value of the option vary with the stock, but if the price of the 
stock is below the exercise price, the option is worthless. See 
Enron, 341 B.R. at 168 (``call and put options are universally 
recognized as conditional, and by extension, risky''). Thus, it 
would be anomalous to subordinate the claims of actual holders of 
stock while allowing investors who merely acquired options to 
purchase or sell those same shares to recover on par with general 
creditors.
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    The provisions of Sec.  1237.9, confirming that a securities 
litigation claim has the same priority in receivership as the 
underlying security out of which it arises, would harmonize aspects of 
receiverships under the Safety and Soundness Act with the bankruptcy 
regime that applies to most other publicly traded corporations. The 
statute governing FHFA's conduct of receiverships does not contain all 
of the details governing insolvent entities that the Bankruptcy Code 
does because Congress expected FHFA to fill in the gaps by 
``prescrib[ing] such regulations as FHFA determines to be appropriate 
regarding the conduct of conservatorships or receiverships.'' 12 U.S.C. 
4617(b)(1); see Chevron U.S.A., Inc. v. Natural Res. Def. Council, 467 
U.S. 837, 843-44 (1984) (``The power of an administrative agency to 
administer a congressionally created * * * program necessarily requires 
the formulation of policy and the making of rules to fill any gap left, 
implicitly or explicitly, by Congress.'' (quoting Morton v. Ruiz, 415 
U.S. 199, 231 (1974))). When Congress enacted 4617(c), it was 
legislating against the backdrop of the statutory and common law 
discussed above treating Securities Litigation Claims derived from 
equity ownership as subordinated to or having the same priority as the 
underlying

[[Page 39467]]

equity. In aligning the priority of Securities Litigation Claims in 
receivership with their treatment in bankruptcy, FHFA follows in the 
path of a number of federal circuit courts that have looked to the 
Bankruptcy Code for guidance on relative priorities of shareholder 
claims as well as other issues arising in receiverships of financial 
institutions. See, e.g., Gaff, 919 F.2d at 393-96; Office and 
Professional Employees Int'l Union v. FDIC, 962 F.2d 63, 68 (DC Cir. 
1992) (Ruth Bader Ginsburg, J.); First Empire Bank-New York v. FDIC, 
572 F.2d 1361, 1368 (9th Cir. 1978).
    Finally, this section would provide that the receiver will 
determine the priority of claims based on their status as of the date 
of default, provided the claim was then in existence. ``Default'' is 
defined in the Safety and Soundness Act, and in this proposed 
regulation, as ``any adjudication or other official determination by 
any court of competent jurisdiction, or by FHFA, pursuant to which a 
conservator, receiver, limited-life regulated entity, or legal 
custodian is appointed for a regulated entity.'' 12 U.S.C. 4502(8). In 
the event of a conservatorship followed by receivership, the date on 
which the conservator was appointed will be treated as the date of 
default for claims that were in existence on that date. This provision 
clarifies that claims cannot move from one priority category to another 
during conservatorship or receivership, potentially resulting in a 
different priority ranking depending on when priority is assessed. Like 
other aspects of this proposed regulation, this provision harmonizes 
the timing of the determination of priority in receivership with the 
longstanding `` `general rule in bankruptcy that the filing of the 
petition freezes the rights of all parties interested in the bankrupt 
estate.' '' Goggin v. Cal. Div. of Labor Law Enforcement, 336 U.S. 118, 
126 n.7 (1949) (quoting 4 Collier on Bankruptcy 228-29 (14th ed. 
1942)); see also United States v. Marxen, 307 U.S. 200, 207 (1939) 
(``the rights of creditors are fixed by the Bankruptcy Act as of the 
filing of the petition in bankruptcy. This is true both as to the 
bankrupt and amongst themselves.''); Everett v. Judson, 228 U.S. 474, 
478-79 (1913) (``the purpose of the [bankruptcy] law was to fix the 
line of cleavage with reference to the condition of the bankrupt estate 
as of the time at which the petition was filed'').\7\
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    \7\ Courts have analogized conservators of financial 
institutions under the Financial Institutions Reform Recovery and 
Enforcement Act of 1989 to trustees in bankruptcy. See, e.g., 
Plymouth Mills, Inc. v. FDIC, 876 F. Supp. 439, 443 (E.D.N.Y. 1995) 
(conservator ``akin to Chapter 11 trustee, in that both attempt to 
restore a financially burdened entity to viability''); Smith v. 
Witherow, 102 F.2d 638, 642 (3d Cir. 1939) (appointment of 
conservator ``quite similar to the appointment of a trustee in a 
proceeding for the reorganization of a corporation under the 
Bankruptcy Act'').
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Section 1237.10 Limited-Life Regulated Entities

    This section discusses the process for setting the policies and 
procedures for organizing a limited-life regulated entity (LLRE) to 
assume or succeed to the assets and liabilities of a regulated entity 
in default or in danger of default. This section would also explain 
that the restriction on investments by a limited-life regulated entity 
under section 1367(i)(4) of the Safety and Soundness Act would apply 
only to the liquidity portfolio of the LLRE. Section 1367(i)(4) states 
``[f]unds of a limited-life regulated entity shall be kept on hand in 
cash, invested in obligations of the United States or obligations 
guaranteed as to principal and interest by the United States, or 
deposited with FHFA, or any Federal reserve bank.'' While a broad 
interpretation of this provision might suggest that an LLRE is barred 
from investing in a retained portfolio, such an interpretation would be 
inconsistent with the powers granted to FHFA under section 
1367(i)(l)(B) to transfer assets of a failed regulated entity to an 
LLRE, subject only to the requirements that they at least be equal to 
the liabilities assumed. Since the retained portfolio of a failed 
Enterprise would be among the principal assets of the Enterprise, and 
the advances of a failed Bank would be among the principal assets of 
the Bank, it would make little sense to interpret the statute to allow 
transfer of assets to the LLRE but bar transfer of a regulated entity's 
most significant assets. Interpreting section 1367(i)(4) to apply only 
to the liquidity portfolio, and not to the retained portfolio, would 
allow FHFA, as receiver, to reconcile the two provisions of the Safety 
and Soundness Act in a reasonable way.

Section 1237.11 Authority of Limited-Life Regulated Entities To Obtain 
Credit

    This section discusses the process by which a limited-life 
regulated entity may obtain credit, either by obtaining unsecured 
credit and issuing unsecured debt, or by obtaining the approval of the 
Director to issue debt with priority over any and all obligation of the 
LLRE, debt secured by a lien on the property of the entity, or debt 
secured by a junior lien on property of the entity already subject to a 
lien. The section also discusses how the Director may authorize an LLRE 
to obtain credit or issue debt that is secured by a senior or equal 
lien on property that is already subject to a lien only if the entity 
is unable to otherwise obtain such credit or issue such debt on 
commercially reasonable terms, and there is adequate protection of the 
interest of the holder of the earlier lien on the property with respect 
to which the senior or equal lien is proposed to be granted. The 
section also offers a definition for the concept of adequate 
protection.

Section 1237.12 Capital Distributions While in Conservatorship

    This section would generally prohibit a regulated entity from 
making a capital distribution in conservatorship, except as permitted 
by the Director. The Safety and Soundness Act and the respective 
authorizing statutes restrict the ability of a regulated entity to make 
capital distributions that would cause the regulated entity to become 
undercapitalized or would otherwise decrease total or core capital of 
the regulated entity below certain levels. See 12 U.S.C. 1452, 1718, 
4614, 4615, and 4616. Because capital distributions are generally 
inconsistent with FHFA's goal of putting the regulated entities in a 
sound and solvent condition, FHFA is implementing these provisions by 
providing that no capital distributions shall be made by a regulated 
entity while in conservatorship, except as permitted by the Director. 
Such capital distributions generally will not be permitted during 
conservatorship because they would be removing capital at precisely the 
time when the Conservator is charged with rehabilitating the regulated 
entity and restoring it to a safe and sound condition. Further, 
restrictions on capital distributions are most consistent with the need 
of a financial regulatory agency to rely on the books and records of a 
financial institution when assessing its capital adequacy. If capital 
investments could be withdrawn based upon claims not reflected in those 
books and records, the regulator's ability to assess the safety and 
soundness of the financial institution would be seriously impaired.
    However, the Director may, in his or her discretion, permit the 
Conservator to make a capital distribution that the Director 
determines: (1) Will enhance the ability of the regulated entity to 
meet the risk-based capital level and the minimum capital level for the 
regulated entity; (2) will contribute to the long-term financial safety 
and soundness of the regulated entity; (3) is otherwise in the interest 
of the regulated entity; or (4)

[[Page 39468]]

is otherwise in the public interest.\8\ These factors include those 
that govern the Director's exercise of his discretion to approve a 
capital distribution by a regulated entity that is classified as 
significantly undercapitalized. See 12 U.S.C. 4616(a)(2)(B). These 
factors would provide the Director with the flexibility to permit the 
regulated entity to make capital distributions that will ultimately 
enhance its ability to fulfill its mission in a safe and sound manner.
---------------------------------------------------------------------------

    \8\ For example, the Director has approved payment of 
contractually required dividends on the Senior Preferred Stock held 
by Treasury pursuant to section 1117 of HERA because these 
extraordinary funding arrangements with Treasury are critical to the 
long-term financial safety and soundness of the Enterprises.
---------------------------------------------------------------------------

    Similarly, the proposed regulation would amend the definition of 
the term ``capital distribution'' in the prompt corrective action 
regulations (12 CFR part 1777) issued by OFHEO \9\ and would 
incorporate that definition into this part. The amended definition 
would include any payment of any claim arising from rescission of a 
purchase or sale of an equity security of an Enterprise or for damages 
arising from the purchase, sale, or retention of such a security. The 
proposed regulation thereby both: (1) Implements 12 U.S.C. 
4502(5)(A)(i), which specifies that any distribution made with respect 
to any shares of an Enterprise, other than a dividend consisting only 
of shares of the Enterprise, is a ``capital distribution''; and (2) 
reflects an exercise of the Director's authority under 12 U.S.C. 
4502(5)(A)(iii) to determine by regulation that particular types of 
transactions are, in substance, the distribution of capital and 
therefore fall within the definition of ``capital distribution.'' FHFA 
considers payment of a claim arising from rescission of a purchase or 
sale of an equity security of an Enterprise or for damages arising from 
the purchase, sale, or retention of such an equity security to be, in 
substance, a distribution of capital because it results in the flow of 
capital out of the Enterprise to current or former equity-holders on 
account of their ownership of an equity interest of the Enterprise. 
From a regulatory standpoint, the economic consequences of such payment 
as they relate to the Enterprise's safety and soundness and ability to 
meet capital requirements are indistinguishable from those posed by a 
payment taking the form of a dividend, repurchase, redemption, or 
retirement of stock. In any of those situations, the Enterprise is no 
longer able to use that capital to meet its obligations and maintain 
its fiscal health; rather, the benefit of that capital has been 
transferred to others on account of their ownership of equity in the 
Enterprise.
---------------------------------------------------------------------------

    \9\ Regulations promulgated by OFHEO continue to be effective 
until FHFA issues its own regulations. See HERA section 1302.
---------------------------------------------------------------------------

Section 1237.13 Payment of Securities Litigation Claims While in 
Conservatorship

    This section reflects that FHFA, as Conservator, will not pay 
Securities Litigation Claims against a regulated entity during 
conservatorship, except to the extent the Director determines 
appropriate. As Conservator, FHFA is charged with ``put[ting] the 
regulated entity in a sound and solvent condition'' and ``preser[ving] 
and conserv[ing] the assets and property of the regulated entity,'' (12 
U.S.C. 4617(b)(2)(D)) and may ``take any action authorized by this 
section, which FHFA determines is in the best interests of the 
regulated entity or FHFA,'' id. 4617(b)(2)(J)(i). FHFA's statutory 
mandate to preserve and conserve the assets of a regulated entity in 
conservatorship, combined with the possibility of future receivership, 
requires it to take a prudent and deliberate approach to the 
disposition of claims by equity-holders that could both impede 
restoring a regulated entity in conservatorship to a sound and solvent 
condition and arbitrarily place some equity-holder claimants above 
others while that regulated entity is in conservatorship.
    The Conservator has plenary authority under the Safety and 
Soundness Act to deal with pending claims against an Enterprise however 
it deems appropriate in the exercise of its duties. The duties of the 
Conservator include ``preserv[ing] and conserve[ing] the assets and 
property of the regulated entity.'' 12 U.S.C. 4617(b)(2)(D); see In re 
Fed. Nat'l Mtg. Ass'n Sec., Deriv. and ``ERISA'' Litig.,--F. Supp.--, 
2009 WL 1837757, *2 n.4 (D.D.C. June 25, 2009) (``Congress has 
determined that responsibility for deciding how to best preserve and 
conserve Fannie Mae's assets lies solely with FHFA for the 
conservatorship period.''); Gibraltar Fin. Corp. v. Fed. Home Loan Bank 
Bd., No. CV 89 3489 WDK(GHKX), 1990 WL 394298, *5 (C.D. Cal. June 15, 
1990) (``a conservator must be afforded great flexibility in the 
operation of a failing institution'') (involving Federal Savings and 
Loan Insurance Corporation as conservator of savings and loan).
    With respect to Securities Litigation Claims in particular, the 
Conservator will be guided by the statutory receivership priority 
scheme in determining whether such claims may properly be paid in light 
of the central fact that conservatorship is temporary and receivership 
is a possibility. See 12 U.S.C. 4617(a)(4)(D) (conservatorship may be 
followed by receivership). The statutory receivership priority scheme, 
as implemented by Sec.  1237.9, provides that claims derived from 
ownership of an equity security of an Enterprise are subordinated to 
all other claims. 12 U.S.C. 4617(c). If the Conservator were to 
authorize payment of Securities Litigation Claims despite the statutory 
receivership priority system ranking such claims below all other 
claims, the purpose of the receivership priority system could be 
thwarted, leaving fewer corporate resources to pay higher-priority 
claims during a subsequent receivership. Indeed, paying such claims on 
a first-come, first-served basis during conservatorship could induce a 
``run on the conservatorship'' with severe adverse repercussions for 
the ultimate success of the ongoing effort to rehabilitate a regulated 
entity in conservatorship. This section of the proposed regulation is 
intended to facilitate the Conservator's discharge of its duty to avoid 
such consequences.
    The approach taken in this section is also consistent with section 
1117 of HERA and the Treasury Agreements thereunder, which allowed FHFA 
to avoid placing Fannie Mae and Freddie Mac in receivership by 
providing the Conservator with access to the billions of federal tax 
dollars necessary to attempt to restore the financial viability of the 
Enterprises through conservator ship. In short, without the continuing 
capital infusions made pursuant to the Treasury Agreements, both 
Enterprises would of necessity have been declared insolvent and placed 
in receivership many months ago. See 12 U.S.C. 4617(a)(4). While this 
might suggest that the Treasury funds would provide an effective source 
of funds for the Conservator to pay a Securities Litigation Claim, the 
purpose of the Treasury Agreements is not to compensate current or 
former equity-holders of the Enterprises for diminution in the value of 
their equity. See HERA section 1117(a), (b) (Treasury authority to 
purchase Enterprise securities to be used to ``provide stability to the 
financial markets,'' ``prevent disruptions in the availability of 
mortgage finance,'' and ``protect the taxpayer''). Rather, the Treasury 
Agreements exclude from the amount that can be drawn, liabilities that 
the Conservator determines shall be subordinated, including ``a claim 
against Seller arising from rescission of a purchase or sale of a 
security issued by [an Enterprise] * * * or for damages arising from 
the purchase, sale or

[[Page 39469]]

retention of such a security.'' Treasury Agreements Sec.  1, definition 
of ``Deficiency Amount,'' subparagraph (iii). Similarly, the Treasury 
Agreements do not allow any distribution with respect to the 
Enterprises' equity interests without Treasury's prior written consent. 
These provisions are in keeping with the intent of both the parties to 
the Treasury Agreements, and Congress in authorizing the Treasury 
Agreements, that the federal tax dollars infused through the 
Conservator be used to help restore the Enterprises to a sound and 
solvent condition, provide stability to the financial markets, prevent 
disruptions in the availability of mortgage financing, and protect the 
taxpayer, rather than to serve as a fund to make equity-holders whole. 
See Treasury Agreements at Background ]] A, B; HERA section 1117.
    In exercising its regulatory authority, FHFA is required ``to 
ensure that the purposes of this chapter and the authorizing statutes 
are accomplished.'' 12 U.S. C. 4526(a). As discussed above, the 
authorizing statutes for the Enterprises, as amended by section 1117 of 
HERA, include the mandate to ``protect the taxpayers'' as an integral 
part of any sale of stock by the Enterprises to Treasury. 12 U.S. C. 
1719(g)(1) (Fannie Mae); 12 U.S. C. 1455(l)(1) (Freddie Mac). This 
section of the regulation is intended to enable the Conservator to 
operate a regulated entity in conservator ship in a manner consistent 
with the policies Congress sought to advance through the enactment of 
HERA by providing a default rule that Securities Litigation Claims will 
not be paid out of conservator ship assets, subject to the discretion 
vested in the Director to find that payment might be appropriate in a 
particular instance because it would be in the interest of the 
conservator ship.
    In exercising FHFA's discretion to consider whether to make an 
exception to permit payment of certain Securities Litigation Claims on 
a case-by-case basis, the Director will be guided primarily by whether 
payment of the claim would be consistent with the Conservator's mandate 
to put the regulated entity in a sound and solvent condition and to 
preserve and conserve the assets and property of the regulated entity. 
The Director may also consider the size and nature of the claim, the 
effect that paying the claim might have on the availability of funds to 
satisfy other claims against the regulated entity, the source of the 
funds from which the claim would be paid, whether any extraordinary 
funding arrangement (such as under section 1117 of HERA) is in place, 
and any other consideration the Director deems appropriate under the 
circumstances.\10\
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    \10\ By evaluating whether to pay a Securities Litigation Claim 
out of conservator ship assets as reflected in Sec.  1237.13, the 
Conservator would not be adjudicating or determining the validity of 
any claim, and non-payment of a claim or judgment would not operate 
to extinguish the claim or judgment. If the Conservator decided 
under Sec.  1237.13 not to pay a Securities Litigation Claim, 
including a judgment, during conservator ship, the claim or judgment 
would continue to exist. If the Enterprise entered receivership, the 
claim or judgment would be disposed of through the receivership 
claims process provided by statute. If the Enterprise exits 
conservator ship without undergoing receivership, the claim or 
judgment would survive the conservator ship and could be pursued or 
enforced against the Enterprise at that time.
---------------------------------------------------------------------------

    This section also clarifies, in paragraph (b), that a LLRE 
established during receivership under section 1367(i) of the Safety and 
Soundness Act will not assume, acquire, or succeed to any Securities 
Litigation Claim against a regulated entity. Section 1367(b)(2)(G) of 
the Safety and Soundness Act provides that FHFA, as conservator or 
receiver, may ``transfer or sell any asset or liability of the 
regulated entity in default, and may do so without any approval, 
assignment, or consent with respect to such transfer or sale.'' 12 U.S. 
C. 4617(b)(2)(G). Further, section 1367(i)(2)(B)(ii) of the Safety and 
Soundness Act provides that ``a limited-life regulated entity shall not 
assume, acquire, or succeed to any obligation that a regulated entity 
for which a receiver has been appointed may have to any shareholder of 
the regulated entity that arises as a result of the status of that 
person as a shareholder of the regulated entity.'' This language is 
similar to section 1367(c)(1)(D) of the Safety and Soundness Act, which 
assigns lowest priority in receivership to ``[a]ny obligation to 
shareholders or members arising as a result of their status as 
shareholder or members.'' For the same reasons discussed above why it 
is appropriate to treat the obligations described in section 
1367(c)(1)(D) as including Securities Litigation Claims, it is equally 
appropriate to treat the language in section 1367(i)(2)(B)(ii) as 
encompassing those same claims. Congress intended for a LLRE to succeed 
to the charter of an Enterprise and to operate free of obligations to 
equity-holders, and it would frustrate that intent and create an 
incongruity if any obligations to equity-holders subordinated under 
section 1367(c)(1)(D) could nevertheless survive and be asserted 
against a LLRE.

Section 1237.14 Golden Parachute Payments

    The treatment of golden parachute payments under conservator ship 
and receivership will be addressed by another proposed rule.

VI. Regulatory Impacts

Paperwork Reduction Act

    The proposed regulation does not contain any information collection 
requirement that requires the approval of the Office of Management and 
Budget under the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
requires that a regulation that has a significant economic impact on a 
substantial number of small entities, small businesses, or small 
organizations must include an initial regulatory flexibility analysis 
describing the regulation's impact on small entities. Such an analysis 
need not be undertaken if the agency has certified that the regulation 
will not have a significant economic impact on a substantial number of 
small entities. 5 U.S.C. 605(b). FHFA has considered the impact of the 
proposed regulation under the RFA. FHFA certifies that the proposed 
regulation, if adopted, is not likely to have a significant economic 
impact on a substantial number of small business entities because the 
regulation is applicable only to the regulated entities and the Office 
of Finance, which are not small entities for purposes of the RFA.

List of Subjects

12 CFR Part 1237

    Capital, Conservator, Federal home loan banks, Government-sponsored 
enterprises, Receiver.

12 CFR Part 1777

    Administrative practice and procedure, Mortgages.

    Accordingly, for the reasons stated in the preamble, under the 
authority of 12 U.S.C. 4513b, 4526, and 4617 the Federal Housing 
Finance Agency proposes to amend chapters XII and XVII of Title 12, 
Code of Federal Regulations, as follows:

CHAPTER XII--FEDERAL HOUSING FINANCE AGENCY

Subchapter B--Entity Regulations

    1. Add part 1237 to subchapter B to read as follows:

[[Page 39470]]

PART 1237--CONSERVATORSHIP AND RECEIVERSHIP

Sec.
1237.1 Purpose and applicability.
1237.2 Definitions.
Subpart A--Powers
1237.3 Powers of the Agency as conservator or receiver.
1237.4 Receivership following conservatorship; administrative 
expenses.
1237.5 Contracts entered into before appointment of a conservator or 
receiver.
1237.6 Authority to enforce contracts.
Subpart B--Claims
1237.7 Period for determination of claims.
1237.8 Alternate procedures for determination of claims.
1237.9 Priority of expenses and unsecured claims.
Subpart C--Limited-Life Regulated Entities
1237.10 Limited-life regulated entities.
1237.11 Authority of limited-life regulated entities to obtain 
credit.
Subpart D--Other
1237.12 Capital distributions while in conservatorship.
1237.13 Payment of Securities Litigation Claims while in 
conservatorship.
1237.14 [Reserved].

    Authority:  12 U.S.C. 4513b, 4526, 4617.


Sec.  1237.1  Purpose and applicability.

    The provisions of this part shall apply to the appointment of the 
Federal Housing Finance Agency (``Agency'') as conservator or receiver 
of a regulated entity. These provisions implement and supplement the 
procedures and process set forth in Public Law 110-289 for conduct of a 
conservatorship or receivership of such entity.


Sec.  1237.2  Definitions.

    For the purposes of this part the following definitions shall 
apply:
    Agency means the Federal Housing Finance Agency (``FHFA'') 
established under 12 U.S.C. 4511, as amended by Public Law 110-289.
    Authorizing statutes mean:
    (1) The Federal National Mortgage Association Charter Act,
    (2) The Federal Home Loan Mortgage Act, and
    (3) The Federal Home Loan Bank Act.
    Capital distribution means, with respect to a regulated entity, the 
definition under 12 CFR 1777.3 or other applicable FHFA regulations.
    Compensation means any payment of money or the provision of any 
other thing of current or potential value in connection with 
employment.
    Conservator means the Agency as appointed by the Director as 
conservator for a regulated entity.
    Default; In Danger of Default: (1) Default means, with respect to a 
regulated entity, any official determination by the Director, pursuant 
to which a conservator or receiver is appointed for a regulated entity.
    (2) In danger of default means, with respect to a regulated entity, 
the definition under section 1303(8)(B) of the Safety and Soundness Act 
or applicable FHFA regulations.
    Director means the Director of the Federal Housing Finance Agency.
    Enterprise means the Federal National Mortgage Association and any 
affiliate thereof or the Federal Home Loan Mortgage Corporation and any 
affiliate thereof.
    Entity-affiliated party means any party meeting the definition of 
an entity-affiliated party under section 1303(11) of the Safety and 
Soundness Act or applicable FHFA regulations.
    Equity security of any person shall mean any and all shares, 
interests, rights to purchase or otherwise acquire, warrants, options, 
participations or other equivalents of or interests in (however 
designated) in equity, ownership or profits of such person, including 
any preferred stock, any limited or general partnership interest and 
any limited liability company membership interest, and any securities 
or other rights or interests convertible into or exchangeable for any 
of the foregoing.
    Executive officer means any person meeting the definition of 
executive officer under section 1303(12) of the Safety and Soundness 
Act or applicable FHFA regulations.
    Golden parachute payment means, with respect to a regulated entity, 
the definition under 12 CFR part 1231 or other applicable FHFA 
regulations.
    Limited-life regulated entity means an entity established by the 
Agency under section 1367(i) of the Safety and Soundness Act with 
respect to a Federal Home Loan Bank in default or in danger of default, 
or with respect to an enterprise in default or in danger of default.
    Office of Finance means the Office of Finance of the Federal Home 
Loan Bank System.
    Receiver means the agency as appointed by the Director to act as 
receiver for a regulated entity.
    Regulated entity means:
    (1) The Federal National Mortgage Association and any affiliate 
thereof;
    (2) The Federal Home Loan Mortgage Corporation and any affiliate 
thereof; and
    (3) Any Federal Home Loan Bank.
    Securities Litigation Claim means any claim, whether or not reduced 
to judgment, liquidated or unliquidated, fixed, contingent, matured or 
unmatured, disputed or undisputed, legal, equitable, secured or 
unsecured, arising from rescission of a purchase or sale of an equity 
security of a regulated entity or for damages arising from the 
purchase, sale, or retention of such a security.
    State means States of the United States, the District of Columbia, 
the Commonwealth of Puerto Rico, the Commonwealth of the Northern 
Mariana Islands, Guam, the Virgin Islands, American Samoa, the Trust 
Territory of the Pacific Islands, and any other territory or possession 
of the United States.
    Transfer means every mode, direct or indirect, absolute or 
conditional, voluntary or involuntary, of disposing of or parting with 
property or with an interest in property, including retention of title 
as a security interest and foreclosure of the equity of redemption of 
the regulated entity.

Subpart A--Powers


Sec.  1237.3  Powers of the Agency as conservator or receiver.

    (a) Operation of the regulated entity. The Agency, as conservator 
or receiver, may:
    (1) Take over the assets of and operate the regulated entity with 
all the powers of the shareholders (including the authority to vote 
shares of any and all classes of voting stock), the directors, and the 
officers of the regulated entity and conduct all business of the 
regulated entity;
    (2) Continue the missions of the regulated entity;
    (3) Ensure that the operations and activities of each regulated 
entity foster liquid, efficient, competitive, and resilient national 
housing finance markets;
    (4) Ensure that each regulated entity operates in a safe and sound 
manner;
    (5) Collect all obligations and money due the regulated entity;
    (6) Perform all functions of the regulated entity in the name of 
the regulated entity that are consistent with the appointment as 
conservator or receiver;
    (7) Preserve and conserve the assets and property of the regulated 
entity (including the exclusive authority to investigate and prosecute 
claims of any type on behalf of the regulated entity, or to delegate to 
management of the regulated entity the authority to investigate and 
prosecute claims); and
    (8) Provide by contract for assistance in fulfilling any function, 
activity, action, or duty of the Agency as conservator or receiver.

[[Page 39471]]

    (b) Powers as conservator or receiver. The Agency, as conservator 
or receiver, shall have all powers and authorities specifically 
provided by section 1367 of the Safety and Soundness Act and paragraph 
(a) of this section, including incidental powers, which include the 
authority to suspend capital classifications under section 1364(e)(1) 
of the Safety and Soundness Act during the duration of the 
conservatorship or receivership of that regulated entity.
    (c) Transfer or sale of assets and liabilities. The Agency may, as 
conservator or receiver, transfer or sell any asset or liability of the 
regulated entity in default, and may do so without any approval, 
assignment, or consent with respect to such transfer or sale. Exercise 
of this authority by the Agency as conservator will nullify any 
restraints on sales or transfers in any agreement not entered into by 
the Agency as conservator. Exercise of this authority by the Agency as 
receiver will nullify any restraints on sales or transfers in any 
agreement not entered into by the Agency as receiver.


Sec.  1237.4  Receivership following conservatorship; administrative 
expenses.

    If a receiver immediately succeeds a conservator, administrative 
expenses of the conservatorship shall also be deemed to be 
administrative expenses of the subsequent receivership.


Sec.  1237.5  Contracts entered into before appointment of a 
conservator or receiver.

    (a) The conservator or receiver for any regulated entity may 
disaffirm or repudiate any contract or lease to which such regulated 
entity is a party pursuant to section 1367(d) of the Safety and 
Soundness Act.
    (b) For purposes of section 1367(d)(2) of the Safety and Soundness 
Act, a reasonable period shall be defined as a period of 18 months 
following the appointment of a conservator or receiver.


Sec.  1237.6  Authority to enforce contracts.

    The conservator or receiver may enforce any contract entered into 
by the regulated entity pursuant to the provisions and subject to the 
restrictions of section 1367(d)(13) of the Safety and Soundness Act.

Subpart B--Claims


Sec.  1237.7  Period for determination of claims.

    Before the end of the 180-day period beginning on the date on which 
any claim against a regulated entity is filed with the Agency as 
receiver, the Agency shall determine whether to allow or disallow the 
claim and shall notify the claimant of any determination with respect 
to such claim. This period may be extended by a written agreement 
between the claimant and the Agency as receiver, which may include an 
agreement to toll any applicable statute of limitations.


Sec.  1237.8  Alternate procedures for determination of claims.

    Claimants seeking a review of the determination of claims may seek 
alternative dispute resolution from the Agency as receiver in lieu of a 
judicial determination. The Director may by order, policy statement, or 
directive establish alternative dispute resolution procedures for this 
purpose.


Sec.  1237.9  Priority of expenses and unsecured claims.

    (a) General. The receiver will grant priority to unsecured claims 
against a regulated entity or the receiver for that regulated entity 
that are proven to the satisfaction of the receiver in the following 
order:
    (1) Administrative expenses of the receiver (or an immediately 
preceding conservator).
    (2) Any other general or senior liability of the regulated entity 
(that is not a liability described under paragraph (a)(3) or (a)(4) of 
this section.
    (3) Any obligation subordinated to general creditors (that is not 
an obligation described under paragraph (a)(4) of this section.
    (4) Any obligation to current or former shareholders or members 
arising as a result of their current or former status as shareholders 
or members, including, without limitation, any Securities Litigation 
Claim.
    (b) Similarly situated creditors. The receiver will provide similar 
treatment to all creditors under paragraph (a) of this section that are 
similarly situated, except that the receiver may take any action 
(including making payments) that does not comply with this section, 
if--
    (1) The Director determines that such action is necessary to 
maximize the value of the assets of the regulated entity, to maximize 
the present value return from the sale or other disposition of the 
assets of the regulated entity, or to minimize the amount of any loss 
realized upon the sale or other disposition of the assets of the 
regulated entity; and
    (2) All creditors that are similarly situated under paragraph (a) 
of this section receive not less than the amount such creditors would 
have received if the receiver liquidated the assets and liabilities of 
the regulated entity in receivership and such action had not been 
taken.
    (c) Priority determined at default. The receiver will determine 
priority based on a claim's status at the time of default, such default 
having occurred at the time of entry into the receivership, or if a 
conservatorship immediately preceded the receivership, at the time of 
entry into the conservatorship provided the claim then existed.

Subpart C--Limited-Life Regulated Entities


Sec.  1237.10  Limited-life regulated entities.

    (a) Status. The United States Government shall be considered a 
person for purposes of section 1367(i)(6)(C)(i) of the Safety and 
Soundness Act.
    (b) Investment authority. The requirements of section 1367(i)(4) 
shall apply only to the liquidity portfolio of a limited-life regulated 
entity.
    (c) Policies and procedures. The Agency may draft such policies and 
procedures with respect to limited-life regulated entities as it 
determines to be necessary and appropriate, including policies and 
procedures regarding the timing of the creation of limited-life 
regulated entities.


Sec.  1237.11  Authority of limited-life regulated entities to obtain 
credit.

    (a) Ability to obtain credit. A limited-life regulated entity may 
obtain unsecured credit and issue unsecured debt.
    (b) Inability to obtain credit. If a limited-life regulated entity 
is unable to obtain unsecured credit or issue unsecured debt, the 
Director may authorize the obtaining of credit or the issuance of debt 
by the limited-life regulated entity with priority over any and all of 
the obligations of the limited-life regulated entity, secured by a lien 
on property of the limited-life regulated entity that is not otherwise 
subject to a lien, or secured by a junior lien on property of the 
limited-life regulated entity that is subject to a lien.
    (c) Limitations. The Director, after notice and a hearing, may 
authorize a limited-life regulated entity to obtain credit or issue 
debt that is secured by a senior or equal lien on property of the 
limited-life regulated entity that is already subject to a lien (other 
than mortgages that collateralize the mortgage-backed securities issued 
or guaranteed by an enterprise) only if the limited-life regulated 
entity is unable to obtain such credit or issue such debt otherwise on 
commercially reasonable terms and there is adequate protection of the 
interest of the holder of the earlier lien on the property with respect 
to which such senior or equal lien is proposed to be granted.

[[Page 39472]]

    (d) Adequate protection. The adequate protection referred to in 
paragraph (c) of this section may be provided by:
    (1) Requiring the limited-life regulated entity to make a cash 
payment or periodic cash payments to the holder of the earlier lien, to 
the extent that there is likely to be a decrease in the value of such 
holder's interest in the property subject to the lien;
    (2) Providing to the holder of the earlier lien an additional or 
replacement lien to the extent that there is likely to be a decrease in 
the value of such holder's interest in the property subject to the 
lien; or
    (3) Granting the holder of the earlier lien such other relief, 
other than entitling such holder to compensation allowable as an 
administrative expense under section 1367(c) of the Safety and 
Soundness Act, as will result in the realization by such holder of the 
equivalent of such holder's interest in such property.

Subpart D--Other


Sec.  1237.12  Capital distributions while in conservatorship.

    (a) Except as provided in paragraph (b) of this section, a 
regulated entity shall make no capital distribution while in 
conservatorship.
    (b) The Director may authorize, or may delegate the authority to 
authorize, a capital distribution that would otherwise be prohibited by 
paragraph (a) of this section if he or she determines that such capital 
distribution:
    (1) Will enhance the ability of the regulated entity to meet the 
risk-based capital level and the minimum capital level for the 
regulated entity;
    (2) Will contribute to the long-term financial safety and soundness 
of the regulated entity;
    (3) Is otherwise in the interest of the regulated entity; or
    (4) Is otherwise in the public interest.
    (c) This section is intended to supplement and shall not replace or 
affect any other restriction on capital distributions imposed by 
statute or regulation.


Sec.  1237.13  Payment of Securities Litigation Claims while in 
conservatorship.

    (a) Payment of Securities Litigation Claims while in 
conservatorship. The Agency, as conservator, will not pay a Securities 
Litigation Claim against a regulated entity, except to the extent the 
Director determines is in the interest of the conservatorship.
    (b) Claims against limited-life regulated entities. A limited-life 
regulated entity shall not assume, acquire, or succeed to any 
obligation that a regulated entity for which a receiver has been 
appointed may have to any shareholder of the regulated entity that 
arises as a result of the status of that person as a shareholder of the 
regulated entity, including any Securities Litigation Claim. No 
shareholder or creditor of a regulated entity shall have any right or 
claim against the charter of the regulated entity once the Agency has 
been appointed receiver for the regulated entity and a limited-life 
regulated entity succeeds to the charter pursuant to this section.


Sec.  1237.14  [Reserved].

CHAPTER XVII--OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT, 
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

PART 1777--PROMPT CORRECTIVE ACTION

    2. The authority citation for part 1777 is revised to read as 
follows:

    Authority:  12 U.S.C. 1452(b)(2), 1456(c), 1718(c)(2), 1723a(k), 
4513(a), 4513(b), 4514, 4517, 4611-4618, 4622, 4623, 4631, 4635.

    3. Amend Sec.  1777.3 by revising the definition of ``Capital 
distribution'' to read as follows:


Sec.  1777.3  Definitions.

* * * * *
    Capital distribution means:
    (1) Any dividend or other distribution in cash or in kind made with 
respect to any shares of, or other ownership interest in, an 
Enterprise, except a dividend consisting only of shares of the 
Enterprise;
    (2) Any payment made by an Enterprise to repurchase, redeem, 
retire, or otherwise acquire any of its shares or other ownership 
interests, including any extension of credit made to finance an 
acquisition by the Enterprise of such shares or other ownership 
interests, except to the extent the Enterprise makes a payment to 
repurchase its shares for the purpose of fulfilling an obligation of 
the Enterprise under an employee stock ownership plan that is qualified 
under the Internal Revenue Code of 1986 (26 U.S.C. 401 et seq.) or any 
substantially equivalent plan as determined by the Director of FHFA in 
writing in advance; and
    (3) Any payment of any claim, whether or not reduced to judgment, 
liquidated or unliquidated, fixed, contingent, matured or unmatured, 
disputed or undisputed, legal, equitable, secured or unsecured, arising 
from rescission of a purchase or sale of an equity security of an 
Enterprise or for damages arising from the purchase, sale, or retention 
of such a security.
* * * * *

    Dated: June 30, 2010.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2010-16723 Filed 7-8-10; 8:45 am]
BILLING CODE 8070-01-P