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

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 340

RIN 3064-AB37

Restrictions on the Purchase of Assets From the Federal Deposit

Insurance Corporation

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is proposing

to issue a rule implementing the requirements of the Resolution Trust

Corporation Completion Act of 1993 that assets held by the FDIC in the

course of liquidating any federally insured institution not be sold to

persons who, in ways specified in the Act, contributed to the demise of

an insured institution. The proposed rule establishes a self-

certification process that is a prerequisite to the purchase of assets

from the FDIC and provides definitions that effectuate the intent of

Congress regarding the scope of the statutory prohibitions.

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

1999.

ADDRESSES: Written comments should be addressed to Robert E. Feldman,

Executive Secretary, Attention: Comments/OES, Federal Deposit Insurance

Corporation, 550 17th St., N.W., Washington, D.C. 20429.

Comments may be hand-delivered to the guard station at the rear of the

550 17th Street Building (located on F street), between the hours of

7:00 a.m. and 5:00 p.m. on business days. (Fax number (202) 898-3838;

Internet: [email protected]). Comments will be available for inspection

and photocopying in the FDIC Public Information Center, Room 100, 801

17th Street, N.W., Washington, D.C., between 9:00 a.m. and 4:30 p.m. on

business days.

FOR FURTHER INFORMATION CONTACT: Steven K. Trout, Senior Resolutions

Specialist, Division of Resolutions and Receiverships, 202-898-3758, or

Elizabeth Falloon, Counsel, Legal Division, 202-736-0725, Federal

Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C.

20429. These are not toll-free numbers.

SUPPLEMENTARY INFORMATION:

Background

a.m. and 4:30 p.m. on

business days.

FOR FURTHER INFORMATION CONTACT: Steven K. Trout, Senior Resolutions

Specialist, Division of Resolutions and Receiverships, 202-898-3758, or

Elizabeth Falloon, Counsel, Legal Division, 202-736-0725, Federal

Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C.

20429. These are not toll-free numbers.

SUPPLEMENTARY INFORMATION:

Background

Section 20 of the Resolution Trust Corporation Completion Act of

1993 (RTCCA or Act) amends section 11(p) of the Federal Deposit

Insurance Act (FDI Act) by adding a provision that restricts the class

of persons eligible to purchase assets held by the FDIC in the course

of liquidating depository institutions. The Act amended the FDI Act by

requiring the FDIC to promulgate regulations which, at a minimum,

prohibit the sale of an asset of a failed financial institution to

certain individuals or entities who may have contributed to the demise

of that institution and prohibit the sale of an asset using FDIC

financing to persons who have defaulted and engaged in fraudulent

activities with respect to a loan from the institution. The FDIC has

adopted policies beginning in 1991 that addressed various statutory

goals as well as other policy concerns. The proposed regulation will

meet the requirements of the statute, and the FDIC will continue to

have other policies regarding purchaser eligibility, such as policies

regarding purchase by individuals and entities who are delinquent in

payment of obligations to the FDIC and purchase by FDIC contractors.

The FDIC's implementation of the requirements of the statute

expands upon the minimum established by statute in several respects.

Under the regulation, prospective purchasers will be restricted from

buying assets from failed financial institutions for which the FDIC is

conservator or receiver in the following circumstances:

Under Sec

obligations to the FDIC and purchase by FDIC contractors.

The FDIC's implementation of the requirements of the statute

expands upon the minimum established by statute in several respects.

Under the regulation, prospective purchasers will be restricted from

buying assets from failed financial institutions for which the FDIC is

conservator or receiver in the following circumstances:

Under Sec. 340.3 of the proposed regulation, if a person or entity

(or its associated person, as that term is defined) has defaulted on

obligations owed to failed financial institutions and the FDIC that

aggregate over $1 million, and made fraudulent misrepresentations in

connection with any one of those obligations, such a person or entity

is prohibited from purchasing any assets of failed financial

institutions using FDIC financing. Although the statute would restrict

only the sale of assets from the failed financial institution that held

the defaulted obligation of the proposed purchaser, restrictions

contained in the regulation apply regardless of which failed

institution's assets are being sold. Because assets are passed through

various institutions from time to time before and after the

institutions are placed in receivership and are sometimes acquired from

institutions in their corporate capacity, it can be difficult to

ascertain which institution may have sustained a loss associated with a

particular asset, or which institution held the asset in question at

various points in time. Also, assets are sometimes sold in bulk,

combining assets from several failed financial institutions. These

factors would make it cumbersome to limit the restriction to the assets

of the particular institution that incurred the loss. Moreover, the

FDIC believes adopting this more stringent approach is consistent with

the Act as the statute sets only the minimum standards that the FDIC

must set in its rule

re sometimes sold in bulk,

combining assets from several failed financial institutions. These

factors would make it cumbersome to limit the restriction to the assets

of the particular institution that incurred the loss. Moreover, the

FDIC believes adopting this more stringent approach is consistent with

the Act as the statute sets only the minimum standards that the FDIC

must set in its rule.

Section 340.4(a)(1) of the regulation provides that if a person

participated as an officer or director of a failed financial

institution or of a related entity in a material way in one or more

transactions that resulted in a substantial (i.e., greater than

$50,000) loss to that failed financial institution, the person would

not, using any source of payment or financing (i.e., whether or not the

FDIC provides financing), be permitted to purchase an asset of any

failed institution from the FDIC. The proposed rule establishes

parameters to determine whether a person or entity has ``participated

in a material way in a transaction that caused a substantial loss to a

failed institution'', as this phrase is not defined in the statute.

This definition includes anyone who has been found by a court or

tribunal (or, in certain circumstances, has been alleged in formal

legal proceedings) in connection with a substantial loss to a failed

institution to have (i) violated any federal banking laws or to have

breached a written agreement with a federal banking agency or with the

failed financial institution; (ii) engaged in an unsafe or unsound

practice in conducting the affairs of the failed institution; or (iii)

breached a fiduciary duty to the failed institution.

Under Sec. 340.4(a)(2), if a person has, by federal regulatory

action, been removed from or barred from participating in the affairs

of any failed financial institution, the person would not, using any

source of payment or financing, be permitted to purchase an asset of

any failed financial institution from the FDIC.

Under Sec

n; or (iii)

breached a fiduciary duty to the failed institution.

Under Sec. 340.4(a)(2), if a person has, by federal regulatory

action, been removed from or barred from participating in the affairs

of any failed financial institution, the person would not, using any

source of payment or financing, be permitted to purchase an asset of

any failed financial institution from the FDIC.

Under Sec. 340.4(a)(3), if a person or related entity has

demonstrated a pattern or practice of defalcation, as defined in the

proposed rule, regarding an obligation to a failed financial

institution, the person would be barred from purchasing any asset or

assets of any failed institution from the FDIC, regardless of the

intended source of financing or payment. The definition of ``pattern or

practice of defalcation'' requires more than one incident involving

either intent or reckless disregard for whether a loss was caused and

requires that the resulting loss be ``substantial''.

Finally, under Sec. 340.4(a)(4), no person who has defaulted on an

obligation to a failed institution and has been convicted of

committing, or conspiring to commit, any offense under section 215,

656, 657, 1005, 1006, 1007, 1014, 1032, 1341, 1343 or 1344 of Title 18

of the United States Code (having generally to do with financial

crimes, fraud and embezzlement) affecting any failed institution will

be permitted to purchase any asset of any failed institution from the

FDIC.

In promulgating this regulation, the FDIC does not intend to imply

that it will provide seller financing in connection with any asset

sales nor that, if it determines to provide seller financing, it will

do so to a person who does not meet other criteria, such as

creditworthiness, as the FDIC may lawfully impose. Further, the FDIC

expressly reserves its authority to promulgate other policies and rules

restricting purchaser eligibility to buy assets from the FDIC

it will provide seller financing in connection with any asset

sales nor that, if it determines to provide seller financing, it will

do so to a person who does not meet other criteria, such as

creditworthiness, as the FDIC may lawfully impose. Further, the FDIC

expressly reserves its authority to promulgate other policies and rules

restricting purchaser eligibility to buy assets from the FDIC.

The proposed rule provides for implementation of the restrictions

set forth above through a self-certification process. All purchasers of

assets covered by the regulation, other than federal, state and local

governmental agencies and instrumentalities and government-sponsored

entities such as Government National Mortgage Association, Fannie Mae

and Freddie Mac, will be required to execute a Purchaser Eligibility

Certification in the form established by the FDIC. Because of the

nature of these entities, including their organizational purposes or

goals and the fact that they are subject to strict

governmental control or oversight, it is reasonable to presume

compliance without requiring self-certification. However, authority is

given to the Director of the FDIC's Division of Resolutions and

Receiverships, or his designee, to require a certification from any of

these entities if facts exist that suggest that such a prospective

purchaser would fall within the restricted categories. Comment is

expressly sought about the nature and scope of this aspect of the

certification requirement.

The prohibitions do not apply to a sale or transfer of assets that

is part of a workout or settlement of obligations to a failed

institution.

Paperwork Reduction Act

these entities if facts exist that suggest that such a prospective

purchaser would fall within the restricted categories. Comment is

expressly sought about the nature and scope of this aspect of the

certification requirement.

The prohibitions do not apply to a sale or transfer of assets that

is part of a workout or settlement of obligations to a failed

institution.

Paperwork Reduction Act

As indicated by Sec. 340.7 of the proposed rule, the FDIC intends

to develop a purchaser eligibility certification relating to this rule.

If the certification is covered by the Paperwork Reduction Act, the

FDIC will publish Federal Register notices and make submissions to the

Office of Management and Budget consistent with the requirements of 5

CFR 1320.10.

Regulatory Flexibility Act

The only burden imposed by this regulation is the completion of a

certification form described above in the Paperwork Reduction Act

section. The burden produced by this requirement does not require the

use of professional skills or the preparation of special reports or

records and has a minimal impact, economic and time-wise, on those

individuals and entities that seek to purchase assets from the FDIC.

Moreover, this minimal burden is imposed only on those entities

voluntarily seeking to purchase assets from the FDIC. Accordingly, the

Board hereby certifies that the proposed rule would not have a

significant economic impact on a substantial number of small entities

within the meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et

seq.). The provisions of the Regulatory Flexibility Act relating to an

initial and final regulatory flexibility analysis (5 U.S.C. 603 and

604) are not applicable.

The Treasury and General Government Appropriations Act, 1999--

Assessment of Federal Regulations and Policies on Families.

19 (Tenth), 1821(p).

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

authority.

(a) Authority. This part is issued by the Federal Deposit Insurance

Corporation (FDIC) pursuant to section 11(p) of the Federal Deposit

Insurance Act (FDI Act), 12 U.S.C. 1821(p), as added by section 20 of

the Resolution Trust Corporation Completion Act (Pub. L. 103-204, 107

Stat. 2369 (1993).

(b) Purpose. The sale by the FDIC of assets of any failed financial

institution to certain persons who profited or engaged in wrongdoing at

the expense of an insured institution, or seriously mismanaged an

insured institution, is prohibited.

(c) Scope. The restrictions of this part generally apply to assets

owned or controlled by the FDIC in any capacity, even though the assets

are not owned by the insured institution that the prospective purchaser

injured. Unless the FDIC determines otherwise, this part shall not

apply to the sale of securities in connection with the investment of

corporate and receivership funds pursuant to the Investment Policy for

Liquidation Funds managed by the FDIC as the same shall be in effect

from time to time. These restrictions shall not apply to any sale by a

trust or other entity of securities backed by a pool of assets that may

include assets of failed institutions to a purchaser other than the

underwriter purchasing in an initial offering.

(d) Preservation of existing authority. Neither section 11(p) of

the FDI Act nor this part in any way limits the authority of the FDIC

to establish policies prohibiting the sale of assets to prospective

purchasers who have injured any FDIC-insured institution or to other

prospective purchasers, such as certain employees or contractors of the

FDIC, or individuals who are not in compliance with the terms of any

debt or duty owed to the FDIC. Any such policies may be independent of,

in conjunction with, or in addition to the restrictions set forth in

this part.

Sec. 340.2 Definitions.

pective

purchasers who have injured any FDIC-insured institution or to other

prospective purchasers, such as certain employees or contractors of the

FDIC, or individuals who are not in compliance with the terms of any

debt or duty owed to the FDIC. Any such policies may be independent of,

in conjunction with, or in addition to the restrictions set forth in

this part.

Sec. 340.2 Definitions.

(a) Associated person of an entity or individual shall mean:

(1) With respect to an individual:

(i) That individual's spouse or dependent child or any member of

that individual's immediate household;

(ii) A partnership of which that individual is or was a general or

limited partner; or

(iii) A corporation of which that individual is or was an officer

or director;

(2) With respect to a partnership, a managing or general partner of

the partnership; or

(3) With respect to any entity, an individual or entity who, acting

individually or in concert with one or more individuals or entities,

owns or controls 25 percent or more of the entity.

(b) Default shall mean any failure to comply with the terms of an

obligation to such an extent that:

(1) A judgment has been rendered in favor of the FDIC or a failed

institution; or (2) In the case of a secured obligation, the property

securing such obligation is foreclosed on.

(c) FDIC shall mean the Federal Deposit Insurance Corporation.

(d) Failed institution shall mean any bank or savings association

that has been under the conservatorship or receivership of the FDIC or

RTC. For the purpose of this part, ``failed institution'' shall be

deemed to include any entity owned and controlled by a failed

institution.

(e) Obligation shall mean any debt or duty to pay money owed to the

FDIC or a failed institution, including any guarantee of any such debt

or duty.

any bank or savings association

that has been under the conservatorship or receivership of the FDIC or

RTC. For the purpose of this part, ``failed institution'' shall be

deemed to include any entity owned and controlled by a failed

institution.

(e) Obligation shall mean any debt or duty to pay money owed to the

FDIC or a failed institution, including any guarantee of any such debt

or duty.

(f) Person shall mean an individual, or an entity with a legally

independent existence, including, without limitation, a trustee; the

beneficiary of at least a 25 percent share of the proceeds of a trust;

a partnership; a corporation; an association; or other organization or

society.

(g) RTC shall mean the former Resolution Trust Corporation.

(h) Substantial loss shall mean:

(1) An obligation that is delinquent for ninety (90) or more days

and on which there remains an outstanding balance of more than $50,000;

(2) An unpaid final judgment in excess of $50,000 regardless of

whether it becomes forgiven in whole or in part in a bankruptcy

proceeding;

(3) A deficiency balance following a foreclosure of collateral in

excess of $50,000, regardless of whether it becomes forgiven in whole

or in part in a bankruptcy proceeding;

(4) Any loss in excess of $50,000 evidenced by an IRS Form 1099-C

(Information Reporting for Discharge of Indebtedness).

Sec. 340.3 Restrictions on the sale of assets by the FDIC in

conjunction with a loan or extension of credit.

A person shall not, in purchasing one or more assets from the FDIC

or any failed institution, receive a loan, advance, or other extension

of credit from the FDIC or any failed institution, if:

(a) There has been a default with respect to one or more

obligations totaling in excess of $1,000,000 owed by that person or its

associated person; and

conjunction with a loan or extension of credit.

A person shall not, in purchasing one or more assets from the FDIC

or any failed institution, receive a loan, advance, or other extension

of credit from the FDIC or any failed institution, if:

(a) There has been a default with respect to one or more

obligations totaling in excess of $1,000,000 owed by that person or its

associated person; and

(b) Such person or its associated person shall have made any

fraudulent misrepresentations in connection with any such

obligation(s).

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

of the method of financing.

(a) No person may acquire any assets from the FDIC or from any

failed institution if the person or its associated person:

(1) Has participated, as an officer or director of a failed

institution or of an affiliate of a failed institution, in a material

way in one or more transaction(s) that caused a substantial loss to

that failed institution;

(2) Has been removed from, or prohibited from participating in the

affairs of, a failed institution, pursuant to any final enforcement

action by the Office of the Comptroller of the Currency, the Office of

Thrift Supervision, the Board of Governors of the Federal Reserve

System, the FDIC, or the successors of any of them;

(3) Has demonstrated a pattern or practice of defalcation regarding

obligations to any failed institution; or

(4) Has been convicted of committing or conspiring to commit any

offense under section 215, 656, 657, 1005, 1006, 1007, 1014, 1032,

1341, 1343 or 1344 of title 18 of the United States Code affecting any

failed institution and there has been a default with respect to one or

more obligations owed by that person or its associated person.

ation regarding

obligations to any failed institution; or

(4) Has been convicted of committing or conspiring to commit any

offense under section 215, 656, 657, 1005, 1006, 1007, 1014, 1032,

1341, 1343 or 1344 of title 18 of the United States Code affecting any

failed institution and there has been a default with respect to one or

more obligations owed by that person or its associated person.

(b) For purposes of paragraph (a) of this section, a person has

participated ``in a material way in a transaction that caused a

substantial loss to a failed institution'' if, in connection with a

substantial loss to a failed institution, the person has been found in

a final determination by a court or administrative tribunal, or is

alleged in a judicial or administrative action brought by the FDIC or

by any component of the government of the United States or of any

state:

(1) To have violated any law, regulation, or order issued by a

federal or state banking agency, or breached or defaulted on a written

agreement with a federal or state banking agency, or breached a written

agreement with a failed institution;

(2) To have engaged in an unsafe or unsound practice in conducting

the affairs of a failed institution; or

(3) To have breached a fiduciary duty owed to a failed institution.

(c) For purposes of paragraph (a) of this section, a person or its

associated person shall have demonstrated a pattern or practice of

defalcations regarding obligations to a failed institution if the

person or associated person has engaged in the following:

(1) The person or associated person has engaged in more than one

transaction which created an obligation on the part of such person or

its associated person with intent to cause a loss to any financial

institution insured by the FDIC or with reckless disregard for whether

such transactions would cause a loss to any such insured financial

institution; and

person has engaged in the following:

(1) The person or associated person has engaged in more than one

transaction which created an obligation on the part of such person or

its associated person with intent to cause a loss to any financial

institution insured by the FDIC or with reckless disregard for whether

such transactions would cause a loss to any such insured financial

institution; and

(2) Such transactions, in the aggregate, caused a substantial loss

to one or more failed institution(s).

Sec. 340.5 Independent determination of eligibility for seller

financing.

The absence of any disqualification under the restrictions set

forth in this part does not create any right to obtain a loan or

advance by or through the FDIC or remove the right of the FDIC to make

an independent determination, based upon all relevant facts of the

offeror's financial condition and history, of the offeror's eligibility

to receive any such loan or advance.

Sec. 340.6 Certain asset sales unaffected by this part.

The effectiveness of this part shall not affect the enforceability

of a contract of sale and/or agreement for seller financing in effect

prior to [insert effective date of final rule].

Sec. 340.7 Certification required.

(a) Except as provided in paragraph (b) of this section, no person

shall purchase any asset from the FDIC, unless that person shall have

certified, under penalty of perjury with notice that a false

certification may lead to punishment under 18 U.S.C. 1001, 1007, 1014

and 1621, in such form as may be established by the FDIC, that none of

the restrictions contained in this part applies to such purchase.

t as provided in paragraph (b) of this section, no person

shall purchase any asset from the FDIC, unless that person shall have

certified, under penalty of perjury with notice that a false

certification may lead to punishment under 18 U.S.C. 1001, 1007, 1014

and 1621, in such form as may be established by the FDIC, that none of

the restrictions contained in this part applies to such purchase.

(b) Notwithstanding paragraph (a) of this section, no certification

shall be required of a state or political subdivision thereof, a

federal agency or instrumentality, the Government National Mortgage

Association, Fannie Mae, or Freddie Mac; provided however, that the

Director of the FDIC's Division of Resolutions and Receiverships, or

his designee, may, in his discretion, require a certification of any

such entity.

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

The restrictions of Secs. 340.3 and 340.4 shall not apply if the

sale or transfer of an asset resolves or settles, or is part of the

resolution or settlement of, one or more obligations, regardless of the

amount of such obligations.

By Order of the Board of Directors.

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

Federal Deposit Insurance Corporation.

James D. LaPierre,

Deputy Executive Secretary.

[FR Doc. 99-24541 Filed 9-20-99; 8:45 am]

BILLING CODE 6714-01-P