Alert July 31, 2012

FDIC Issues Final Rule Prohibiting Investment in Corporate Debt Securities by Savings Associations

The FDIC issued a final rule (the “Rule”) that prohibits federally-insured state and federal savings associations from acquiring or holding a corporate debt security when the security’s issuer does not have an adequate capacity to meet all financial commitments under the security for the projected life of the security.  The Rule was issued under Section 939(a) of the Dodd-Frank Act and released as Financial Institutions Letter 34-2012.

Before acquiring a corporate debt security, and periodically thereafter, the Rule requires that a savings association determine that an issuer has adequate capacity to meet all financial commitments under the security for the projected life of the security.  The FDIC’s standards of creditworthiness set forth in the Rule will be satisfied if the issuer of the corporate debt security presents a low risk of default and is deemed likely to make a full and timely repayment of principal and interest.  Additionally, the FDIC issued final guidance (the “Guidance”) that sets forth due diligence standards for determining the credit quality of a corporate debt security.  The Guidance states that a due diligence analysis of a corporate debt security may include consideration of internal analyses, third-party research and analytics including internal risk ratings, the default statistics of external credit rating agencies, and other sources of information appropriate for the particular security.  The Guidance further provides that the range and type of specific factors a savings association should consider will vary depending on the particular type and nature of the security.  The FDIC noted that it does not expect the Rule to change the scope of permissible corporate debt securities investments for savings associations. For example, if a corporate bond was a permissible investment prior to the Rule because it was rated in one of the four highest categories, a bond with similar default probabilities would be a permissible investment under the Rule.

The Rule applies to all savings associations regardless of asset size.  Savings associations must be in compliance with this rule by January 1, 2013.

The FDIC issued a final rule (the “Rule”) that prohibits federally-insured state and federal savings associations from acquiring or holding a corporate debt security when the security’s issuer does not have an adequate capacity to meet all financial commitments under the security for the projected life of the security.  The Rule was issued under Section 939(a) of the Dodd-Frank Act and released as Financial Institutions Letter 34-2012.

Before acquiring a corporate debt security, and periodically thereafter, the Rule requires that a savings association determine that an issuer has adequate capacity to meet all financial commitments under the security for the projected life of the security.  The FDIC’s standards of creditworthiness set forth in the Rule will be satisfied if the issuer of the corporate debt security presents a low risk of default and is deemed likely to make a full and timely repayment of principal and interest.  Additionally, the FDIC issued final guidance (the “Guidance”) that sets forth due diligence standards for determining the credit quality of a corporate debt security.  The Guidance states that a due diligence analysis of a corporate debt security may include consideration of internal analyses, third-party research and analytics including internal risk ratings, the default statistics of external credit rating agencies, and other sources of information appropriate for the particular security.  The Guidance further provides that the range and type of specific factors a savings association should consider will vary depending on the particular type and nature of the security.  The FDIC noted that it does not expect the Rule to change the scope of permissible corporate debt securities investments for savings associations. For example, if a corporate bond was a permissible investment prior to the Rule because it was rated in one of the four highest categories, a bond with similar default probabilities would be a permissible investment under the Rule.

The Rule applies to all savings associations regardless of asset size.  Savings associations must be in compliance with this rule by January 1, 2013.