Toward a National FinTech Charter: Comptroller Proposes Receivership Rule for Uninsured Banks
On Tuesday, Sept. 13, the Office of the Comptroller of the Currency (OCC) published a notice of proposed rulemaking and request for public comment (the Proposed Rule) introducing a regulatory regime to govern the receivership of national banks that are not insured (uninsured banks) by the Federal Deposit Insurance Corporation (FDIC). See OCC, Receiverships for Uninsured National Banks, 81 Fed. Reg. 62,835, 62,835 (Sept. 13, 2016) (the Proposed Rule). While the Proposed Rule would apply to the existing pool of 52 uninsured national trust banks, its broader impact would be to establish a receivership regime that would support the creation of new forms of limited purpose, uninsured banks for the financial technology (FinTech) industry. The Proposed Rule would not apply to uninsured federal branches and agencies of foreign banks under the International Banking Act of 1978. Proposed Rule at 62,838.
Prior to the Great Depression, the OCC exercised receivership authority over national banks, and a significant body of common law developed regarding those receiverships. During the period 1933 through 1989, that authority was transferred to the FDIC. Following the passage of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and the Federal Deposit Insurance Corporation Improvement Act of 1991, however, the reference to the FDIC acting as receiver for uninsured banks pursuant to the Federal Deposit Insurance Act was removed, leaving the OCC to appoint receivers pursuant to its general authority under the National Bank Act. As the OCC acknowledges, it does not enjoy under its statutory grant the sweeping receivership powers of the FDIC. Id. at 62,836.
While the OCC has not previously acted to formalize that authority through regulation, its consideration of limited purpose, uninsured charters for FinTech companies has led it to consider the receivership framework for such entities in greater detail. As the OCC says in the Proposed Rule:
As part of the agency’s initiative on responsible innovation in the Federal banking system, the OCC is considering how best to implement a regulatory framework that is receptive to responsible innovation, such as advances in financial technology. In conjunction with this effort, the OCC is considering whether a special purpose charter could be an appropriate entity for the delivery of banking services in new ways. For this reason, the OCC requests comment on the utility of the receivership structure in the proposed rule for receivership of such a special purpose bank. Proposed Rule at 62,837 (footnote omitted).
The Proposed Rule is brief. The OCC’s grounds for appointing a receiver, which could be the OCC or another governmental entity or third party, would parallel the FDIC’s with respect to an insured bank and would require public notice of the receiver’s appointment. Unlike an FDIC receivership, however, the administrative claims process would not be exclusive — claimants could submit their claims for judicial review in addition to, or as an alternative to, filing a claim with the OCC. Claims disallowed by the OCC could be brought to a court for de novo review. This potential for dual tracking creates some significant practical challenges for managing such a receivership.
Approved claims and administrative expenses would be paid out of the proceeds of the assets of the uninsured bank. The receiver’s powers and duties in furtherance of winding up an uninsured bank would include “taking possession of the books and records of the bank, collecting on debts and claims owed to the bank, selling or compromising bad or doubtful debts (with court approval), and selling the bank’s real and personal property (also with court approval).” See Proposed Rule at 62,841. Claimants holding a valid security interest would be treated as secured up to the value of the collateral; amounts in excess would be unsecured. The Proposed Rule recognizes banks’ set-off rights against claimants, with the net difference allowable as a claim. See Proposed Rule at 62,839–40; see also 12 U.S.C. §§ 193–194 (2012).
In addition, the receiver may “close the uninsured bank’s fiduciary and custodial appointments, or transfer such accounts to a successor fiduciary or custodian under 12 CFR 9.16 or other applicable Federal law.” See id. at 62,840–41. The Proposed Rule also incorporates, without specification, reference to the general powers of a receiver under the National Bank Act and common law, which the OCC asserts include the authority to repudiate certain contracts, including executory contracts, contracts that involve fraud or misrepresentation or contracts that are “contrary to public policy.” See id. at 62,842–43.
Payments from the assets of the receivership estate would be made in the following priority: (1) administrative expenses of the receiver; (2) unsecured creditors; (3) subordinated unsecured creditors; and (4) shareholders, ratably in accordance with their shares. In order to balance the need to quickly distribute funds for proven claims, but reserve sufficient funds to pay other claims that may be subject to a somewhat drawn-out dispute process, the OCC proposes that the receiver make “ratable dividends from available receivership funds … for claims that have been proved to the OCC’s satisfaction or adjudicated in a court of competent jurisdiction …. periodically, at the discretion of the OCC, as the receiver liquidates the assets of the uninsured bank.” Proposed Rule at 62,842. The OCC specifically seeks comment on this approach.
Pursuant to 12 U.S.C. § 197, a receivership terminates when all claims have been paid in full and any residual amounts have been distributed ratably to shareholders. At that point, shareholders may vote to continue oversight by the OCC or to end the receivership and appoint a liquidating agent. The OCC seeks comment on whether to contemplate other termination circumstances “such as when there are no receivership assets remaining after completion of receivership activities.” See id. at 62,842–43.
In sum, the Proposed Rule is an important first step in the process to enable the OCC to support financial innovation through a limited purpose, uninsured charter targeted for the FinTech industry. Although the Proposed Rule is understandably broadly worded in light of the inapplicability of the Federal Deposit Insurance Act, entities contemplating such a charter should consider whether clarification of any of the provisions of the Proposed Rule would help avoid unnecessary ambiguity that may impair the ability of such uninsured banks to contract with third parties who would be at risk in an OCC receivership.