Monday, September 06, 2010

Legislative History Cautions FDIC on Taking Lien on Insurance Company under Dodd-Frank Liquidation Authority

Title II of the Dodd-Frank Act establishes an orderly liquidation authority for large faining financal firms that threaten US financial stability, with the FDIC as receiver. Senator Dodd said that Section 204(d) of the Dodd-Frank Act contemplates that the FDIC, as receiver, may take a lien on assets of a covered financial company or a covered subsidiary. With respect to assets of a covered subsidiary that is an insurance company or a direct or indirect subsidiary of an insurance company, Senator Dodd believes that the FDIC should exercise such authority cautiously to avoid weakening the insurance company and thereby undermining policyholder protection. Indeed, any lien taken on the assets of a covered subsidiary that is an insurance company or a direct or indirect subsidiary of an insurance company must avoid weakening or undermining policyholder protection. As a result, the FDIC should normally not take a lien on the assets of such a covered subsidiary except where the FDIC sells the covered subsidiary to a third party, provides financing in connection with the sale, and takes a lien on the assets of the covered subsidiary to secure the third party’s repayment obligation to the FDIC. It is Senator Dodd’s understanding that the FDIC intends to promulgate regulations consistent with this view. (Cong. Record, July 15, 2010, S5927).

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