Financial Institution bankruptcy act Prepared for the National Bankruptcy Conference Annual Meeting 2014

Overview of FIBA Enables the “SPOE” mechanism for the resolution of SIFIs, i.e., single point of entry. FDIC publicly announced that SPOE is its strategy for implementing resolution under Title II of Dodd-Frank Defining attributes: Permits assets to be moved out of estate immediately in exchange for equity in a new bridgeco Imposes stay protecting affiliates and bridgeco against ipso facto and anti-assignment provisions (as well as the debtor) to preserve status quo at bridgeco. Separates bridgeco from the bankruptcy process and puts it under control of a “special trustee”

SPOE Transfer Special Trust Bridgeco Bank Broker Dealer Other DIP/Trustee (estate) Special Trust Bridgeco Bank Broker Dealer Other Special trust holds shares in Bridgeco for benefit of estate (beneficial interests held in estate) DIP/Trustee transfers shares in subsidiaries to Bridgeco

SPOE after transfer DIP/Trustee (estate) Bridgeco Bank Broker Dealer Beneficial interests Special Trust Equity Bridgeco Bank Broker Dealer Other

Section analysis Summary of significant provisions in FIBA

Commencing the case Only a “covered financial corporation” is eligible Bank holding company that exists for the primary purpose of owning, controlling and financing its subsidiaries with (1) over $50 billion in consolidated assets, (2) at least 85% of revenues from financial activities, and (3) at least 85% of assets related to financial activities. Sec. 101(9A).* Bankruptcy Judge appointed from specially created panel of judges. FIBA Sec. 4(a) (amending chapter 13 of title 28). Voluntary eligibility: to best of knowledge, it is a covered financial corporation. Sec. 1183(a)(1). Involuntary: Federal Reserve Board only. Sec. 1183(a)(2). Losses have or will deplete all or substantially all the capital Insolvent Not paying or unable to pay debts [not “in the ordinary course of business”] (i)-(iii) likely to happen sufficiently soon so filing “necessary to prevent serious adverse effects on financial stability in the United States” and transfer to bridgeco necessary for same reason. If voluntary case, or if involuntary case consented to, exculpation for good faith actions by directors Sec. 1183(e). Statutory references are to the Bankruptcy Code, as proposed to be amended by FIBA, unless otherwise noted.

Commencing the Case -- continued If the involuntary petition is contested, bankruptcy court holds hearing, with notice going only to (1) the debtor, (2) the FDIC, (3) the Comptroller of the Currency (Treasury), and (4) the Secretary of the Treasury. Board may request that proceedings be sealed. Sec. 1183(b)(1) and (2). Bankruptcy court must decide within 18 hours. Standard: preponderance of the evidence. Sec. 1183(c)(2). Appeals must be filed within an hour of decision and go to specially designated court of appeals panel. Sec. 1183(d)(1) and (2); FIBA Sec. 4(a)(amending chapter 13 of title 28). Appellate court must enter decision within 14 hours of the notice of appeal. Standard: abuse of discretion. Sec. 1183(d)(2). The Board, the SEC, the Office of the Comptroller of the Currency (Treasury) and the FDIC may be heard on any issue in case or proceeding under subchapter V. Sec. 1184.

Tranferring to bridgeco – Section 1185 On motion with no less than 24 hours notice to regulatory bodies, 20 lasrgest secured creditors, 20 largest unsecured creditors and counterparties of debt, exec. contracts, leases and QFCs (“transferred relationships”) proposed to be transferred. Sec. 1185(a) and (b). No assumption of capital structure debt (unsecured debt for borrowed money) No transfer unless (inter alia) Necessary to prevent serious adverse effects on financial stability No capital structure debt to be assumed No transfer of encumbered assets unless lien remains and court determines transfer is in best interests of the estate OR transfer occurs in accordance with section 363. No transfer of secured debt without also transferring encumbered assets. Bridgeco is not likely to fail to meet obligations under transferred relationships A special trustee is appointed to hold all the equity of bridgeco Adequate provision made for administrative expenses of estate and for special trustee Governing docs of bridgeco and the initial directors and senior officers are in the best interests of creditors and the estate. Sec. 1185(c)

Special Trustee – Section 1186 The order approving a transfer under section 1185 will require the trustee[/DIP] to transfer equity in bridgeco to a “qualified and independent special trustee” to hold the equity “in trust for the sole benefit of the estate” (subject to trustee fees and expenses). Sec. 1186(a)(1). The trust agreement is approved by the bankrupty court “as in the best interests of the estate”. The trust’s sole purpose is to hold and dispose of the equity of bridgeco. Sec. 1186(a)(1). Trust agreement must provide that no sale of bridgeco equity will occur without consulting twith the FDIC and the Board and reporting to the court. Sec. 1186(b)(4). The trustee[/DIP] must consult with Board and report to the court on proposed special trustee. Sec. 1186(a)(2). The trust agreement must specify process and guidelines for replacing the special trustee. Sec. 1186(b)(6). The special trustee must provide information: (1) quarterly reporting; (2) information requested for a disclosure statement at the parent; (3) change in directors or senior management; (4) modifications to governing documents; (5) material corporate action at bridgeco. Sec. 1186(b). The trust must distribute assets upon confirmation of the chapter 11 plan at the parent or upon conversion to a chapter 7. Sec. 1186(c)(1). It terminates after distributing the assets. Sec. 1186(c)(2). Note: A plan may not be confirmed unless the court finds that confirmation “is not likely to cause serious adverse effects on financial stability in the United States.” Sec. 1129(a)(18). Once the transfer has occurred, the special trustee is governed by applicable nonbankruptcy law only. Sec. 1186(d).

Special Stay Provisions – Section 1187 For first 48 hours (or until the transfer motion is approved or rejected), no termination, acceleration or modification under debt, contracts or leases of debtor or any affiliate because of (1) debtor default (Note: No protection for affiliate default); (2) ipso facto events; (3) credit rating events for the debtor, an affiliate or bridgeco. Sec. 1187(a)(1) and (2). The stay continues for bridgeco for ipso facto, credit rating, anti-assignment and change of control provisions, after assumption by bridgeco. (See next slide.) The stay continues for affiliates for ipso facto and credit rating after the transfer so long as the equity of the affiliate has been transferred to bridgeco. Sec. 1187(a)(3)(B)(i). The stay also continues for anti-assignment provisions so long as bridgeco has assumed all of the debtor’s obligations and credit enhancements in connection with the affiliate contract, lease, debt and QFCs. Sec. 1188(e). (See slide 11.) Relief from this special stay is available under Sec. 362. Sec. 1187(a)(4). The automatic stay is not modified and continues for the debtor under section 362.

Special Stay Provision -- Continued The transfer under section 1185 is permitted notwithstanding any “anti-assigment” provisions, i.e., provisions that restrict assignment or terminate rights upon assignment or a change of control. Sec. 1187(b). The stay prevents modification or termination of any rights or obligations under any contract, lease or agreement as to bridgeco (i.e., once the contract, lease or agreement is assumed by bridgeco) solely because of an ipso facto (including credit rating events) or anti-assignment provision. Sec. 1187(c)(1). If there are any defaults other than ipso facto (including credit rating events) or anti-assignment defaults, bridgeco (1) “shall cure the default”, (2) compensate or provide adequate assurance that it will promptly compensate the counter-party for actual pecuniary loss, and (3) provide adequate assurance of future performance, as determined by the bankruptcy court under section 1185. Sec. 1187(c)(2).

QFCs and Affiliates – Section 1188 The special stay provisions generally apply to QFCs of the debtor and its affiliates, with important modifications: The stay also prevents setoff, netting, credit enhancement triggers Sec. 1188(a). Even during the first 48 hour period, the trustee[/DIP] or affiliate must continue to perform, and the counterparty must also perform or will be in breach. Sec. 1188(b). No debtor QFC can be transferred to bridgeco unless all debtor QFCs with the same counterparty are also assigned, together with all claims of and against the debtor, and all credit enhancements. Sec. 1188(c) The stay continues for all contracts, leases, debts and QFCs with affiliates for (1) ipso facto (including credit rating) events; and (2) anti-assignment provisions so long as bridgeco continues to own at least 50% of the affiliate (directly or indirectly) and has assumed all related credit enhancements formerly provided by the debtor. Sec. 1188(e).

Other Licenses, permits and registrations can be transferred to bridgeco notwithstanding the effect of any ipso facto or anti-assignment provision. Sec. 1189. Section 1145 extends to securities of bridgeco as long as bankruptcy court finds that the disclosure statement provides adequate information about bridgeco and the securities. Sec. 1190. Transfers, including release of obligations, by the debtor to or for the benefit of an affiliate in contemplation of or in connection with a transfer to bridgeco are not avoidable under secs. 544, 547, 548(a)(1)(B) or 549. Sec. 1191. The court may consider the effect that any decision may have on financial stability in the United States. Sec. 1192. Chapter 13 of Title 28 is amended to (1) add the panel of bankruptcy and appellate judges, (2) give appellate courts jurisdiction over orders for relief and orders of dismissal, and (3) disclaim the grant of any jurisdiction to a district court after transfer of any proceeding related to the special trustee or the bridge company. FIBA Sec. 4.

Capital Market committee actions Committee raised need for liquidity facility and loss-absorbing capital for SPOE approach in general Committee representatives raised five primary concerns of the Capital Market Committee in drafting sessions

Drafting process: Oversight of Special Trust What we raised Result Require creation of a special trust to remove bridgeco from the bankruptcy estate Special trustee is now mandatory Require special trustee to be appointed by and report to Federal Reserve Board Remove control over special trustee from estate and give to Federal Reserve Board State that trust has fiduciary duties to estate Debtor must consult with Federal Reserve Board on selection of special trustee and report to court on consultation Court has to find trust agreement in best interests of estate and creditors and trust agreement must include provisions governing replacement of special trustee and senior management (but note: exists for the sole purpose of holding the equity of bridgeco for the sole benefit of the estate) No specific fiduciary duty provisions; nonbankruptcy trust law applies

Drafting process– Coordinating the two procedures What we raised Result Do not allow a premature plan process to dissolve the special trust The court now must find under sec. 1129(a) that confirmation “is not likely to cause serious adverse effects on the financial stability in the United States” A new provision allows the court to consider the effect any decision may have “on financial stability in the United States.”

Drafting process –Transfer and assumption What we raised Result Counterparties must have opportunity to be heard on cure or adequate assurance of cure before transfer and adequate assurance of future performance Notice must go to counterparties of transferred contracts (previously just QFCs) The 24 hour minimum notice runs from order for relief (not commencement of case, which in case of involuntary is without notice) The transfer and assumption must provide for cure (adequate assurance of cure is not sufficient). (Note: If contract is in default after transfer, the stay does not prevent the counterparty from taking action.) Transfer not approved without showing the bridge company “not likely to fail to meet the obligations” under the contracts. [This replaced a provision requiring that the court find adequate assurance of future performance.]

Drafting process – Secured Debt What we raised Result Affirmatively provide that transfer of property is not free and clear of liens; court is not required to permit credit bidding Either a transfer of encumbered property must comply with section 363 or (1) all of the secured debt must be assumed with the transfer of the encumbered property and (2) the court finds the assumption is in the best interests of the estate

Drafting process – clarify applicability of bankruptcy provisions What we raised Result Clarify that assets and contracts remain property of the estate in the brief period between the transfer and the assumption Clarify that sections 363, 364 and 365 apply to estate notwithstanding the special provisions. Added that upon transfer and assumption, property and contracts are no longer property of the estate [Draft bill had already provided that bridgeco could only hold assumed contracts.]