Contributed by Sylvia Mayer, Kathlene Burke, Kelly DiBlasi and Alex Radetsky.
Recent Development
In April 2011, the Federal Deposit Insurance Corporation (the “FDIC”) published a notice of proposed rulemaking (“Proposed Rule”) to implement the requirements of section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was followed by a three-month period for interested parties to submit their comments to the Proposed Rule. Following consideration of these comments and modification of the Proposed Rule, on September 13, 2011, the FDIC approved a final rule (the “Final Rule”) implementing section 165(d) of the Dodd-Frank Act.

As summarized in the chart below, the Final Rule departs from the Proposed Rule in several significant ways reflecting careful consideration of the comments submitted:

  • Resolution Plans to be submitted within 180 days following effective date of the Final Rule
  • Resolution Plans to be submitted on a staggered timeline with the largest and most complex Covered Companies submitting their plans in July 2012
  • One size fits all approach imposing the same requirements on all Covered Companies
  • Tailored or streamlined planning option for less complex Covered Companies
  • Confidentiality was not addressed
  • Covered Companies must designate which portions of the submission are confidential and must include in the public portion an executive summary that includes a high-level description of their resolution strategy
Other Insolvency Proceedings:
  • Resolution Plan to address resolution under the Bankruptcy Code
  • Resolution Plan to address resolution under the Bankruptcy Code for entities eligible to file bankruptcy
  • For material entities (i.e., entity has $50 billion or more in total assets or the entity conducts a critical operation) ineligible to file bankruptcy, Resolution Plan should address resolution under applicable insolvency regime, including strategy and actions that should be taken in the proceeding
Interim Changes:
  • Covered Companies must provide an interim update to the regulators within 45 days of a material change
  • Covered Companies must provide a notice to the regulators within 45 days of a material change
Data Production:
  • Each Covered Company must provide its unconsolidated balance sheet and a consolidating schedule for all entities that are subject to consolidation
  • Each Covered Company must provide its unconsolidated balance sheet and a consolidating schedule for all material entities that are subject to consolidation
  • The data production requirements have now been keyed to other reporting requirements in the Federal Deposit Insurance Act in order to limit conflicting and distinct information disclosures to the FDIC under various statutory and regulatory requirements
Credit Exposure Reports:
  • Rule to be implemented concurrent with Final Rule on Living Wills
  • Final rule determination deferred to be implemented concurrent with other FRB rulemaking

Resolution Plans:
Effective Date:
Pursuant to section 165(d)(8) of the Dodd-Frank Act, the Board of Governors of the Federal Reserve System (the “FRB”) and the FDIC are directed to jointly issue rules implementing the provisions of section 165(d). In accordance with this authority, the Final Rule expands upon and effectuates the terms of section 165(d) by establishing detailed requirements, timelines, procedures, standards of review, and consequences of noncompliance for Resolution Plans. As noted above, the FDIC has deferred issuance of a final rule governing Credit Exposure Reports.
The FDIC having approved the Final Rule, the next step is for the FRB to consider and approve the Final Rule. Then it will be published in the Federal Register. The FDIC has proposed that the Final Rule become effective 30 days after publication in the Federal Register. The Dodd-Frank Act requires that the FDIC and the FRB jointly issue final rules no later than January 21, 2012. It is anticipated that the Final Rule will become effective prior to that deadline and possibly as early as the end of October 2011.
Covered Companies:
Section 165(d) of the Dodd-Frank Act provides generally for required, periodic submission by each of (i) nonbank financial companies supervised by the FRB, (ii) U.S. bank holding companies with assets of $50 billion or more, and (iii) foreign banks or companies that are or are treated as bank holding companies under section 8(a) of the International Banking Act of 1978 with global assets of $50 billion or more (collectively, “Covered Companies”), to the FDIC and the FRB of such bank’s or company’s plan for “rapid and orderly resolution in the event of material financial distress or failure” (a “Resolution Plan,” often referred to as a “Living Will”) as well as reports disclosing the nature and extent to which such company has credit exposure to other significant nonbank financial companies and significant bank holding companies (collectively, “Significant Companies”), and vice versa (a “Credit Exposure Report”). The Resolution Plans will be made available to Financial Stability Oversight Council (“FSOC”) upon request.
Timing for Submission:
The Final Rule requires each Covered Company to submit its initial Resolution Plan on a staggered basis depending on the size of the company, as of the effective date of the Final Rule. Covered Companies have been divided into four groups:

  • The first group, consisting of Covered Companies that have $250 billion or more in total nonbank assets (or, in the case of a Covered Company that is foreign-based company, such company’s total U.S. nonbank assets), must file an initial Resolution Plan on or before July 1, 2012.
  • The second group, consisting of Covered Companies that have $100-249 billion or more in total nonbank assets (or, in the case of a Covered Company that is foreign-based company, such company’s total U.S. nonbank assets), must file an initial Resolution Plan on or before July 1, 2013.
  • The third group, consisting of the remaining Covered Companies, must file their Resolution Plan on or before December 31, 2013.
  • Post effective date Covered Companies, must file their Resolution Plan by July 1 following the date the company becomes a Covered Company, so long as they have been a Covered Company for at least 270 days.

Thereafter, each Covered Company must submit an updated Resolution Plan on or before subsequent anniversary dates of the date for submission of its initial plan for as long as they remain a Covered Company.
In the event a Covered company experiences an event or change in circumstances that results in, or could reasonably be foreseen to have a “material effect” on the company’s Resolution Plan, the Covered Company must file a notice with the FDIC and the FRB no later than 45 days after such event or change in circumstances. The notice should describe the material event and why the event may require changes to the Covered Company’s Resolution Plan. The Covered Company must then revise its next annual Resolution Plan incorporating that event. All of the foregoing, however, is subject to the authority of the FRB and the FDIC to extend such time periods or require more frequent submissions, or waive the requirement that a Covered Company submit an update to a Resolution Plan.
One important change reflected in the Final Rule stems from voiced concerns regarding confidentiality. In response, the Final Rule enables a Covered Company to designate a portion of its Resolution Plan as confidential. Each Resolution Plan must contain a public section that includes an executive summary of the Resolution Plan providing a high level description of the business of the Covered Company and its resolution strategy. All or portions of the remainder of the Resolution Plan may be designated as confidential by the Covered Company. To preserve the confidential nature of the confidential section of the Resolution Plan, a Covered Company should submit a properly substantiated request for confidential treatment under exemption 4 of the Freedom of Information Act.
Informational Content:
A Covered Company that is domiciled in the United States is required to provide information with regard to both its U.S. operations and its foreign operations. A foreign-based Covered Company is required to provide information regarding its U.S. operations, an explanation of how resolution planning for its U.S. operations is integrated into the foreign-based Covered Company’s overall resolution planning process and information regarding the interconnections and interdependencies among its U.S. operations and its foreign-based operations.
The Resolution Plan must set forth the Covered Company’s plan for rapid and orderly resolution under title 11 of the United States Code (the “Bankruptcy Code”) in the event of material financial distress at, or failure of, the Covered Company. “Rapid and orderly resolution” is defined as a reorganization or liquidation “that can be accomplished within a reasonable period of time and in a manner that substantially mitigates the risk that the failure of the Covered Company would have serious adverse effects on financial stability in the United States.” While the initial Resolution Plan may rely on a baseline economic scenario for causes of failure, the FRB will conduct annual stress tests and provide Covered Companies with various sets of economic conditions.  Further, if the Covered Company relies on a “material entity” (a subsidiary that conducts core business lines or critical operations) and that material entity is able to seek relief pursuant to the Bankruptcy Code, then the Resolution Plan must assume the failure or discontinuation of such material entity and describe the strategy that will be taken by the Covered Company and the material entity to mitigate any adverse effects of such failure on the financial stability of the United States. Finally, if a Covered Company relies on a material entity that is subject to an insolvency regime other than the Bankruptcy Code, the Final Rule provides that the Covered Company need only include such entity in its strategic analysis if such material entity either has $50 billion or more in total assets or conducts a critical operation. For these entities, the Covered Company should address the strategy and actions to be taken in the alternative insolvency regime. The rules make clear that the Resolution Plan must assume no funding from the United States or other government outside of the ordinary course of business.
The Final Rule sets forth substantial requirements for the informational content of a Resolution Plan. In summary, each Resolution Plan must include:

  • An executive summary;
  • A strategic analysis of what the plan entails, how it will be implemented, and why it will be effective;
  • A description of how resolution planning is integrated into the company’s corporate governance structure and processes, including identification of procedures and policies to share information with, and ensure accountability of, senior management and directors of the Covered Company;
  • A map of the Covered Company’s strategy for maintaining and funding critical operations and core business lines to its material entities and the actions that would be taken in the event of a failure or discontinuation of same to prevent any adverse effect on the financial stability of the United States;
  • Detailed information about the Covered Company’s organizational structure (including information about ownership, jurisdiction, and management of each entity), critical operations and core business lines, financial statements, capital and cash flows, liabilities, pledged collateral, trading and derivatives activities, hedging activities, major counterparties, and material trading systems;
  • Detailed information about the key management information systems and applications (for risk management, accounting, and financial and regulatory reporting), as well as related agreements and intellectual property, used by the Covered Company and its material entities, and a description of the process for supervisory or regulatory agencies to access such systems and applications;
  • Identification of the interconnections and interdependencies among the Covered Company and its material entities, critical operations, and core business lines (including shared resources, funding arrangements, credit and other exposures, and cross-entity liabilities);
  • An analysis of whether the bankruptcy of a major counterparty would likely have an adverse impact on and result in the material financial distress or failure of the Covered Company;
  • Identification of federal, state or foreign agencies or authorities with supervisory authority or responsibility over the Covered Company and its material entities and operations;
  • A description of the Covered Company’s processes and systems used to collect, maintain, and report the information and other data underlying the Resolution Plan and any deficiencies in same; and
  • Certain key contact information.

Compliance with these informational requirements will necessitate the implementation of efficient systems to synthesize and analyze voluminous data. Specifically, any action plan surrounding the creation of a Resolution Plan will require (i) significant initial diligence to identify critical operations and entities, create a “domino analysis” of the effect of any restructuring on the entire corporate group, identify intercompany interdependencies, summarize debt and assets, and examine the company’s cash management systems and liquidity needs; (ii) development of an implementation strategy and optimal form of resolution (including analyzing valuation, feasibility, and liquidity issues); (iii) development and management of processes for data collection and reporting responsibilities; (iv) evaluation of regulatory considerations and necessary approvals; and (v) development of an implementation protocol. In an effort to avoid balance sheet manipulation to escape from reporting under the Final Rule, a company will remain a Covered Company until it has less than $45 billion in total consolidated assets, based on the most recent annual report, as applicable, the average of the four most recent quarterly reports made to the FRB. A company can become a Covered Company once again, if it later reports $50 billion in total consolidated assets.
Iterative Process:
The regulators have made it clear that they intend the process of developing Resolution Plans to be an iterative one, involving an open dialogue between the regulators and the Covered Company. The FRB and the FDIC do not expect that they will find initial Resolution Plan iterations to be deficient, but rather view initial Resolution Plans as providing the foundation for developing more robust annual Resolution Plans over the next few years after the submission of the initial plan.
Tailored Plans:
The Final Rule allows a Covered Company to file a “tailored” Resolution Plan that focuses only on resolution of the company’s nonbank operations if (i) the Covered Company has less than $100 billion in total nonbank assets (or, in the case of a Covered Company that is a foreign based company, the total U.S. nonbank assets) and (ii) the Covered Company owns or controls an insured depository institution whose assets comprise 85 percent or more of the Covered Company’s total consolidated assets (or, in the case of a Covered Company that is foreign-based, the company’s U.S. insured depository institution operations, branches, and agencies comprise 85 percent or more of such Covered Company’s U.S. total consolidated assets).
A “tailored” Resolution Plan will generally cover the informational requirements described above with respect to the Covered Company and its non-banking material entities and also should focus on the interconnections and interdependencies between the Covered Company, its non-banking material entities and operations, and its insured depository institutions. Further, a “tailored” Resolution Plan must include a strategy for ensuring that any insured depository institutions subsidiary will be adequately protected from risks arising from the activities of nonbank subsidiaries of the Covered Company.
Requisite Approvals and Consequences for Noncompliance:
Prior to the submission of a Covered Company’s initial and annual Resolution Plan to the FRB and the FDIC, each such plan must be approved by the board of directors of the Covered Company or, in the case of a foreign-based Covered Company, a delegee acting under the express authority of the board of directors. Within 60 days of receiving a Resolution Plan, the FRB and the FDIC will jointly determine whether it meets the informational requirements and is acceptable for review. If the plan is informationally incomplete, the FRB and the FDIC will notify the Covered Company of the deficiencies, and the Covered Company will have 30 days to resubmit a revised plan. Once a Resolution Plan is accepted for review, the FRB and the FDIC will jointly determine whether it is a credible plan that will facilitate an orderly resolution of the Covered Company under the Bankruptcy Code without systemic risk. The FRB and the FDIC will notify the Covered Company of any deficiency in this regard, and the Covered Company must correct and resubmit the plan within 90 days of receipt of such notice, including an explanation of how such deficiencies are addressed. The Final Rule permits the FRB and the FDIC to extend these deadlines on their own initiative or in response to a request by the Covered Company. In response to certain comments received, the Final Rule specifically notes that the FRB and the FDIC recognize that Resolution Plans may vary based upon the unique characteristics and needs of the respective Covered Companies and, therefore, the FRB and the FDIC intend to take into account a variety of differentiating factors between companies that include, among other things, core business lines, critical operations, domestic and foreign operations, capital structure, risk, complexity, financial activities, and size. Furthermore, the Final Rule indicates that there is no expectation by the FRB and the FDIC that initial Resolution Plans will be found to be deficient, but rather the agencies intend to use initial Resolution Plans as a foundation for the future development of more robust plans in the next few years.
If a Covered Company fails to timely submit a Resolution Plan or fails to remedy deficiencies identified by the FRB and the FDIC, then the FRB and the FDIC may subject the Covered Company or any of its subsidiaries to more stringent capital, leverage, or liquidity requirements, or restrictions on growth, activities or operations, until such time as the Covered Company submits an acceptable, revised Resolution Plan. If, however, the Covered Company does not submit a revised Resolution Plan within the two-year period beginning on the date on which the FRB and the FDIC imposed capital requirements or growth restrictions, then the FRB and the FDIC, in consultation with FSOC, may direct the Covered Company to divest such assets or operations as are necessary to facilitate an orderly resolution of the Covered Company under the Bankruptcy Code.
No Binding Effect:
Importantly, the Final Rule explicitly states that a Resolution Plan submitted pursuant to section 165 (d) will have no binding effect on, among others, a court or trustee in a case commenced under the Bankruptcy Code or a receiver appointed pursuant to Title II of the Dodd-Frank Act. In addition, nothing in the Final Rule creates or is intended to create a private right of action based on a Resolution Plan or any action taken by the FRB or the FDIC with respect to a Resolution Plan.
Implications and Open Issues:
Although changes reflected in the Final Rule address many of the concerns raised in public comments, there are significant implications to be considered and many open issues left unanswered. Compliance with the Final Rule’s mandates regarding the creation and submission of Resolution Plans is a huge undertaking, with substantial implications for Covered Companies and their senior management and directors. Financial and personnel resources will be taxed as companies endeavor to gather the necessary data and conduct the analyses required by the rule. Some of the key practical challenges that Covered Companies likely will face include (i) collecting substantial amounts of data that may not exist in a central location, and likely will require the development of technology to sustain a long-term information gathering system; (ii) understanding the company’s structural complexities, in the face of a potential lack of institutional knowledge with respect to acquired or merged businesses; (iii) certainly with respect to the first group of Covered Companies, complying with the Final Rule’s relatively short timeframes; and (iv) reconciling the Covered Company’s obligation under the Final Rule to avoid systemic risk with the company’s duty to its shareholders to maximize the value of its assets in a chapter 11 proceeding. This task is further complicated by several important issues and questions left unresolved in the Final Rule. In drafting a Resolution Plan, Covered Companies will have to struggle with important issues such as (i) how to resolve key subsidiaries that are not eligible debtors under the Bankruptcy Code (such as foreign subsidiaries, broker dealers, regulated banks, and insurance companies); (ii) how to protect from systemic risk caused by a Covered Company’s defaults and failure to pay its creditors (as opposed to risk caused by failures of the company’s systemically critical operations), given the Bankruptcy Code prohibition on payment of prepetition creditors and the ability of derivatives counterparties to terminate derivatives contracts; and (iii) how to ensure the enforceability of key intercompany services agreements during a bankruptcy case. In addition, the Final Rule does not address how, if at all, the FRB and the FDIC will coordinate with foreign jurisdictions to avoid overlapping (and potentially conflicting) regulation and duplicative Resolution Plans, and achieve international consistency for Covered Companies with cross-border operations.
Although not explicitly required in the Final Rule, it is feared by some commentators that compliance with the Final Rule may require subsidiarization – the “hiving off” of a company’s systemically important businesses into stand-alone subsidiaries with their own management, systems, capital, and liquidity pools. Foreign jurisdictions have focused heavily on this approach. The theory is that, by segregating entities and removing or reducing interdependencies, a company can limit the extent to which the failure of one entity affects the larger corporate enterprise and, perhaps, make it easier to resolve that entity. Subsidiarization, however, could severely, negatively impact Covered Companies’ operations by reducing the benefits of consolidated management, eliminating operational benefits such as the use of common technology bases and intercompany service agreements, forcing clients with global needs to interact with multiple entities, increasing the possibility of systemic risk by prohibiting global management of risk, and increasing expenses associated with the management of liquidity and capital.
In light of the foregoing, Covered Companies likely will have to work closely with legal and other professional advisors with significant restructuring and regulatory experience to draft a Resolution Plan that both strictly complies with the Final Rule and also effectively deals with these open issues and important implications. Expert advisors will be essential in order to assist companies with determining which strategic approach – reorganization or liquidation – is feasible and best accomplishes the statute’s goal of mitigating risk to the country’s financial stability, as well as how to deal with issues such as liquidity and funding critical operations during the restructuring (without relying on the provision of any extraordinary governmental financial support) and providing sufficient protection against risks to affiliated insured depositories. Clearly, the process will demand much cooperation and communication between each Covered Company and the FRB and the FDIC. The consequences of not having a credible Resolution Plan are severe, and the Final Rule contains many requirements that are governed by subjective standards that are subject to discretion. Moreover, the Final Rule lacks a clear, objective guideline for what constitutes “credible.” Having experienced, well respected professional advisors working with the Covered Company on the Resolution Plan likely will enhance and add credibility to any dialogue with these government agencies, as well as ensure the submission of an acceptable Resolution Plan that will eliminate or minimize any need for intervention by the FRB or the FDIC.
Credit Exposure Reports:
Although the Proposed Rule included proposed guidance for the submission of Credit Exposure Reports, the Final Rule does not contain credit exposure reporting requirements. The FRB and the FDIC have postponed rulemaking in this area in order to provide greater consistency with the FRB’s separate rulemaking regarding credit concentrations.
A draft of the Final Rule as of September 9, 2011 is available here. In addition the staff of the FDIC published a memorandum which discusses the differences between the Proposed Rule and the Final Rule. A copy of the memorandum is available here.