Legal Entity Rationalization and Separability
LER 1. Data Room
Q. What information should be in the data room?
A. The 2018 Guidance addresses the data room on page 24. The data room should contain the necessary information on discrete sales options to facilitate buyer due diligence. Including only a table of contents of information that could be provided when needed would not be sufficient.
Q2. Are firms expected to include in a data room described on p. 24 of the 2018 Guidance lists of individual employee names and compensation levels?
A2. The firm should include the necessary information to facilitate buyer due diligence. In the circumstance where employee information would be important to buyer due diligence the firm should demonstrate the capability to provide such information in a timely manner. For individual employee names and compensation, the data room may include a representative sample and may have personally identifiable information redacted.
LER 2. Legal Entity Rationalization Criteria
Q. Is it acceptable to take into account business-related criteria, in addition to the resolution requirements, so that the LER Criteria can be used for both resolution planning and business operations purposes?
A. Yes, LER criteria may incorporate both business and resolution considerations. In determining the best alignment of legal entities and business lines to improve the firm's resolvability under different market conditions, business considerations should not be prioritized over resolution needs.
LER 3. Creation of Additional Legal Entities
Q. Is the addition of legal entities acceptable, so long as it is consistent with the LER criteria?
A. Yes.
LER 4. Clean Funding Pathways
Q1. Can you provide additional context around what is meant by clean lines of ownership and clean funding pathways in the legal entity rationalization criteria? Additionally, what types of funding are covered by the requirements?
A1. The funding pathways between the foreign parent, U.S. IHC, and U.S. IHC subsidiaries should minimize uncertainty in the provision of funds and facilitate recapitalization. Also, the complexity of ownership should not impede the flow of funding to a U.S. non-branch material entity under the firm's U.S. resolution strategy. Potential sources of additional complexity could include, for example, multiple intermediate holding companies, tenor mismatches, or complicated ownership structures (including those involving multiple jurisdictions or fractional ownerships). Ownership should be as clean and simple as practicable, supporting the U.S. strategy and actionable sales, transfers, or wind-downs under varying market conditions. The clean funding pathways expectation applies to all funding provided to a U.S. non-branch material entity regardless of type and should not be viewed solely to apply to internal TLAC.
Q2. The 2018 Guidance regarding legal entity rationalization criteria discusses "clean lines of ownership" and "clean funding pathways." Does this statement mean that firms' legal entity rationalization criteria should require funding pathways and recapitalization to always follow lines of ownership?
A2. No. However, the firm should identify and address or mitigate any legal, regulatory, financial, operational, and other factors that could complicate the recapitalization and/or liquidity support of U.S. non-branch material entities.
LER 5. Separability Options Information
Q. How should a firm approach inclusion of legal risk assessments and other buyer due diligence information into separability options?
A. The legal assessment should consider both buyer and seller legal aspects that could impede the timely or successful execution of the divestiture option. Where impediments are identified, mitigation strategies should be developed.
LER 6. Market Conditions
Q. What is meant by the phrase "under different market conditions" in the Legal Entity Rationalization and Separability section of the 2018 Guidance?
A. The phrase "under different market conditions" is meant to ensure that a firm has a menu of divestiture options from which at least some could be executed under different market stresses.
LER 7. Application of Legal Entity Rationalization Criteria
Q1. Which legal entities should be covered under the LER framework?
A1. The scope of a firm's LER criteria should apply to the entire U.S. operations.
Q2. To the extent a firm has a large number of similar U.S. non-material entities (such as single-purpose entities formed for Community Reinvestment Act purposes), may a firm apply its legal entity rationalization criteria to these entities as a group, rather than at the individual entity level?
A2. Yes.
LER 8. Application of LER Criteria
Q. Under the 2018 Guidance, is there an expectation that the LER criteria be applied to the legal structure outside of the U.S. operations (e.g. outside of the U.S. IHC or U.S. branch)?
A. The LER criteria serve to govern the corporate structure and arrangements between U.S. subsidiaries and U.S. branches in a manner that facilitates the resolvability of U.S. operations. The Guidance is not intended to govern the corporate structure in jurisdictions outside the U.S. The application of the LER criteria should, among other things, ensure that the allocation of activities across the firm's U.S. branches and U.S. non-branch material entities support the firm's US resolution strategy and minimize risk to US financial stability in the event of resolution.
Moreover, LER works with other components to improve resolvability. For example, with regard to shared services the firm should identify all shared services that support critical operations, maintain a mapping of how/where these services support core business lines and critical operations, and include this mapping into the legal rationalization criteria and implementation efforts.