CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
996 OREGON LAW REVIEW [Vol. 89, 951
As I and many others have proposed, Dodd-Frank establishes a
systemic resolution process—the OLA—to handle the failures of
SIFIs. 184 In order to invoke the OLA for a “covered financial
company,” the Treasury Secretary must issue an SRD, based on the
recommendation of the FRB together with either the FDIC or the SEC
(if the failing company’s largest subsidiary is a securities broker or
dealer) or the Federal Insurance Office (if the failing company’s
largest subsidiary is an insurance company). 185 The Treasury
Secretary’s SRD must find that (1) the covered financial company’s
failure and resolution under otherwise applicable insolvency rules
(e.g., the federal bankruptcy laws) would have “serious adverse
effects on financial stability,” (2) application of the OLA would
“avoid or mitigate such adverse effects,” and (3) “no viable private
sector alternative is available to prevent” the company’s failure. 186
In my previous article, I argued that the systemic resolution process
for SIFIs should embody three core principles in order to create a
close similarity between that process and Chapter 11 of the federal
Bankruptcy Code. Those core principles are: (1) requiring equity
owners in a failed SIFI to lose their entire investment if the SIFI’s
assets are insufficient to pay all valid creditor claims, (2) removing
senior managers and other employees who were responsible for the
SIFI’s failure, and (3) requiring unsecured creditors to accept
meaningful “haircuts” in the form of significant reductions of their
184 S. REP.NO. 111-176, at 4–6, 57–65 (2010); Wilmarth, supra note 6, at 756–57.
185 Dodd-Frank Act § 203(a). “Covered financial companies” include nonbank
financial companies that have been designated as SIFIs under section 113 of the Dodd-
Frank Act, large BHCs, and any other financial company as to which the Treasury
Secretary has issued an SRD in order to invoke the OLA. Id. § 201(a)(8), (11).
186 Id. § 203(b). If the board of directors of a covered financial company does not agree
to the appointment of the FDIC as receiver under the OLA, the Treasury Secretary’s SRD
will be subject to expedited judicial review in an emergency confidential proceeding in the
U.S. District Court for the District of Columbia. Id. § 202(a). The district court must
issue its order within twenty-four hours after the Treasury Secretary files a petition to
initiate the proceeding. Id. § 202(a)(1)(A). If the district court fails to issue its order
within that time period, the Treasury Secretary’s petition will be deemed approved as a
matter of law. Id. § 202(a)(1)(A)(v). The district court’s scope of review is limited to two
issues: (1) whether the company in question is a “financial company” as defined in section
201(11) of the Dodd-Frank Act and (2) whether the company is “in default or danger of
default.” Id. § 202(a)(1)(A)(iv). After the SRD becomes final, the Treasury Secretary
must provide reports of the SRD to Congress and the public, and the SRD must be audited
by the GAO in a manner similar to my proposed SRD Review Procedure. Id. § 203(b),
(c); see also Wilmarth, supra note 6, at 752, 752 n.178. In contrast to my proposal,
congressional review of an SRD is discretionary rather than mandatory. See Dodd-Frank
Act § 203(c)(3)(C) (providing that the FDIC and the primary financial regulator—if any—
for a failed SIFI must appear before Congress to testify on the SRD “if requested”).