NU Online News Service, March. 17, 1:45 a.m.EDT

WASHINGTON—The Federal Deposit Insurance Corporation has issuedan interim final regulation dealing with the liquidation of atroubled non-bank financial company, including an insurer.

It gives the agency sole discretion over whether it will take alien on insurance company assets if the FDIC is appointed receiverof the insurance company and it advances funds to facilitate theorderly liquidation of the failing company under Title II,according to an industry lawyer.

The lawyer, who asked not to be named but is based inWashington, D.C., said the rationale given by the FDIC for thisauthority is that this "will best avoid the possibility of harmfuldelay and help ensure a speedy and orderly liquidationprocess." 

The lawyer said that the big insurance issue "is a fear that theFDIC liens could somehow take precedence over insurance claims inthe run off liquidation process."

The FDIC issued the rule under authority of Title II of theDodd-Frank financial services reform law.

The provision gives authority to the FDIC to take over atroubled non-bank holding company based on a determination by theFederal Reserve Board, the Federal Office of Insurance, and theTreasury Department, in consultation with the FDIC, that thecompany is in default or imminent danger of default and that thecompany's failure would have serious adverse effects on thenation's financial stability.

The industry's concern with the regulation is exacerbated, thelawyer said, because the Obama administration has yet to name thetwo "statutorily prescribed insurance voices on the FinancialStability Oversight Council," an independent insurancerepresentative.

Lawyers for several firms that deal with insurance companiescautioned that in the case of insurance companies, the FDICauthority is only a backup.

It will rarely be used, two lawyers said, because the provisionof the Dodd-Frank law the rule implements "to a great extent givesthe states primary authority to resolve troubled insurancecompanies domiciled in their states."

Moreover, if a state declines to get involved, and federalregulators determine that liquidation is still required, the FDICis required to wind down those companies under state insurancelaws, one of the lawyers said.

The lawyers, both based in Washington, D.C., asked that theirnames not be used.

The FDIC said in the interim final rule that it would take alien if it makes the determination, in its "sole discretion," thatthe lien is "necessary for the orderly liquidation of the company"and "will not unduly impede or delay the liquidation orrehabilitation of the insurance company or the recoveries by itspolicyholders." 

The Property Casualty Insurers Association of America (PCI) haspreviously expressed concern that the FDIC's exercise of "solediscretion" to take such a lien, without apparent deference to oreven consultation with state regulators, would amount to undueinterference with state authority over the regulation of insurancecompanies. 

The FDIC acknowledges this issue in the interim rule, citing aprovision of Dodd-Frank that says "in general," the liquidation ofan insurance company under Title II shall be conducted as providedunder state law.

But the FDIC concluded that it should have the sole discretionto make the determinations of whether a lien is necessary for acompany's orderly liquidation, and that the lien would not undulyimpede or delay the liquidation or rehabilitation of the insurancecompany or the recoveries by its policyholders.

Story was updated by removing the reference to an FIOdirector not being named. Shortly after this story was posted, theTreasury named Michael McRaith as FIO director.