Under the safe-harbor provisions, most counterparties that entered into a  qualifying transaction with the debtor may exercise certain contractual  rights even if doing so otherwise would violate the automatic stay. This regulatory resolution  authority allows for FDIC to be appointed receiver for a financial company  if the Secretary of the Treasury, in consultation with the President,  determines, upon the recommendation of two-thirds of the Board of  Governors of the Federal Reserve and (depending on the nature of the  financial firm) FDIC, SEC, or the Director of the Federal Insurance Office,  among other things, that the firm’s failure and its resolution under  applicable law, including bankruptcy, would have serious adverse effects  on U.S. financial stability and no viable private-sector alternative is  available to prevent the default. Based on the UNCITRAL model law, Chapter 15  contains a public policy exception that allows a U.S. court to refuse  cooperation and coordination if doing so would be “manifestly contrary to  the public policy of the United States.”

	No Changes Have Been Made to the Bankruptcy Code but Proposals Were Introduced in the Previous Congress

		Two Proposals Would Have Made Broad Changes Relating to Complex Financial Institutions

Since we last reported on financial company bankruptcies in July 2013,  no changes have been made to Chapters 7, 11, or 15 of the Bankruptcy  Code relating to large financial companies, although two bills were  introduced in the 113th Congress that would have attempted to address  challenges associated with the reorganization of large financial firms as  governed by Chapter 11 of the Code. The Taxpayer Protection and Responsible Resolution Act (S. 1861) also  would have changed the treatment of QFCs in bankruptcy. A second bankruptcy reform proposal, the Financial Institution Bankruptcy  Act of 2014 (H.R. 5421) would  not have repealed Title II of the Dodd-Frank Act. For example, each of the bankruptcy reform bills and FDIC’s SPOE  strategy under OLA would have allowed for the creation of a bridge  company, in which assets, financial contracts, and some legal entities of  the holding company would have been transferred, allowing certain  subsidiaries to have maintained operations. In addition, OLA, like the bills,  included a temporary stay for QFCs. The 21st  Century Glass-Steagall Act of 2013 (S. 1282 in the Senate and H.R. This legislative proposal was neither signed  into law nor re-introduced in the current Congress, as of March 12, 2015. Recent Efforts to Enhance International Coordination to Resolve Failing Financial Companies under Bankruptcy

In the United States the presumptive mechanism to resolve a failed cross- border large financial company continues to be through the judicial  bankruptcy process, though no statutory changes have been made to  Chapter 15 of the Code or the U.S. judicial bankruptcy process to address  impediments to an orderly resolution of a large, multinational financial  institution. However, while some structural challenges discussed earlier  remain, others, such as conflicting regulatory regimes and the treatment  of cross-border derivatives, are being addressed through various efforts. In 2014, FDIC and the Federal Reserve sent letters to a  number of large financial companies identifying specific shortcomings  with the resolution plans that those firms will need to address in their  2015 submissions, due on or before July 1, 2015, for the first group of  filers. In  October 2011, the Financial Stability Board (FSB)—an international body  that monitors and makes recommendations about the global financial  system—issued a set of principles to guide the development of resolution  regimes for financial firms active in multiple countries. These stays are  intended to give resolution authorities and insolvency administrators time  to facilitate an orderly resolution of a troubled financial firm. We  received technical comments from the Department of the Treasury, FDIC,  Federal Reserve, and SEC, which we incorporated as appropriate. Appendix II: Objectives, Scope, and Methodology

Section 202(e) of the Dodd-Frank Wall Street Reform and Consumer  Protection Act (Dodd Frank Act) mandated that we report on the  orderliness and efficiency of financial company bankruptcies every year  for 3 years after passage of the act, in the fifth year, and every 5 years  thereafter. This report, the fourth in the series, examines (1) recent  changes to the U.S. Bankruptcy Code (Code) and (2) efforts to improve  cross-border coordination to facilitate the liquidation and reorganization of  failed large financial companies under bankruptcy. For each of our objectives, we reviewed relevant regulations and laws,  including the Code and the Dodd-Frank Act as well as GAO reports that  addressed bankruptcy issues and financial institution failures. We interviewed officials from the following federal agencies due to their  role in financial regulation and bankruptcy proceedings: AOUSC; the  Commodity Futures Trading Commission (CFTC); Federal Deposit  Insurance Corporation (FDIC); Department of Justice; Department of the  Treasury (Treasury), including officials who support the Financial Stability  Oversight Council (FSOC); Federal Reserve; and Securities and  Exchange Commission (SEC). We also reviewed academic literature on financial  company bankruptcies and regulatory resolution, transcripts of  congressional hearings on bankruptcy reform, and transcripts from expert  roundtables on bankruptcy reform that were hosted by GAO in 2013. To address our second objective, we reviewed Chapter 15 of the  Bankruptcy Code, which relates to coordination between U.S. and foreign  jurisdictions in bankruptcy cases in which the debtor is a company with  foreign operations, for any changes.
Why GAO Did This Study

The challenges associated with the bankruptcies of large financial companies during the 2007-2009 financial crisis raised questions about the effectiveness of the U.S. Bankruptcy Code and international coordination for resolving complex financial institutions with cross-border activities.
The Dodd-Frank Act mandates that GAO report on an ongoing basis on ways to make the U.S. Bankruptcy Code more effective in resolving certain failed financial companies. GAO has issued three reports on this issue. This fourth report addresses (1) recent changes to the U.S. Bankruptcy Code and (2) efforts to improve cross-border coordination to facilitate the liquidation or reorganization of failed large financial companies under bankruptcy.
GAO reviewed laws, court documents, regulations, prior GAO reports, and academic literature on financial company bankruptcies and regulatory resolution. GAO also reviewed documentation from foreign financial regulators and international bodies such as the Financial Stability Board. GAO interviewed officials from the Administrative Office of the United States Courts, Department of Justice, Department of the Treasury, and financial regulators with a role in bankruptcy proceedings.
GAO makes no recommendations in this report. The Department of the Treasury, Federal Reserve, FDIC, and the Securities and Exchange Commission provided technical comments on a draft of the report that GAO incorporated as appropriate.

What GAO Found

The U.S. Bankruptcy Code (Code) chapters dealing with the liquidation or reorganization of a financial company have not been changed since GAO last reported on financial company bankruptcies in July 2013. However, bills introduced in the previous Congress would, if re-introduced and passed, make broad changes to the Code relevant to financial company bankruptcies. The Financial Institution Bankruptcy Act of 2014 (H.R. 5421) and Taxpayer Protection and Responsible Resolution Act (S.1861) would have expanded to varying degrees the powers of the Board of Governors of the Federal Reserve System (Federal Reserve) and Federal Deposit Insurance Corporation (FDIC) and would have imposed a temporary stay on financial derivatives (securities whose value is based on one or more underlying assets) that are exempt from the automatic stay under the Code. That stay would prohibit a creditor from seizing or taking other action to collect what the creditor is owed under the financial derivative. The bills also would have added to the Code processes for the resolution of large, complex financial companies similar in some ways to provisions currently in the Orderly Liquidation Authority (OLA) in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which grants FDIC the authority to resolve failed systemically important financial institutions under its receivership. For example, each bill would have allowed for the creation of a bridge company, in which certain assets and financial contracts of the holding-company would be transferred, allowing certain subsidiaries to continue their operations. The 21st Century Glass-Steagall Act of 2013—a bill introduced in the House of Representatives (H.R. 3711) and the Senate (S. 1282)—would have repealed safe-harbor provisions that allow most counterparties in a qualifying transaction with the debtor to exercise certain contractual rights even if doing so would otherwise violate the automatic stay. As of March 12, 2015, these legislative proposals had not been re-introduced in Congress.
In the United States, the presumptive mechanism to resolve a failed large financial company with cross-border operations is through the judicial bankruptcy process. Since GAO's 2013 report, no changes have been made to the chapter of the Code that relates to coordination between U.S. and foreign jurisdictions in bankruptcy cases in which the debtor has foreign operations. Some structural challenges remain, such as conflicting regulatory regimes related to the treatment of financial contracts between parties in different countries when a firm enters bankruptcy, but efforts are underway to address them. Regulators have implemented a Dodd-Frank Act provision that requires certain large financial firms to submit a resolution plan to assist with an orderly bankruptcy process, which regulators expect to help address potential problems with international cooperation, among others. However, in 2014, FDIC and the Federal Reserve identified shortcomings with the plans for a number of large financial companies that those firms are to address in their 2015 submissions. Further, international bodies, such as the Financial Stability Board—an international body that monitors and makes recommendations about the global financial system—have focused on having countries adopt a regulatory approach to resolutions. Other recent actions include a January 2015 stay protocol for derivatives contracts developed by the International Swaps and Derivatives Association that is intended to give regulators time to facilitate an orderly resolution of a troubled firm.