Orrick's Financial Industry Week in Review

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Financial Industry Developments

Federal Reserve Proposes Adding Additional Asset Types to Meet LCR Requirements

On May 21, the Federal Reserve Board proposed adding certain general obligation state and municipal bonds to the range of assets a banking organization may use to satisfy the Liquidity Coverage Ratio (LCR) requirements designed to ensure that large banking organizations have the capacity to meet their liquidity needs during a period of financial stress. Subject to specified limits, the proposed rule would allow investment grade, general obligation U.S. state and municipal bonds to be counted as high-quality liquid assets (HQLA) up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities. Release. Proposal.

Fannie Mae and Freddie Mac to Issue New Seller/Servicer Eligibility Requirements

On May 20, the FHFA announced that Fannie Mae and Freddie Mac are issuing new finalized operational and financial eligibility requirements for mortgage seller/servicers. The updated requirements will be communicated through guides, bulletins and announcements and through best practices documents provided by Fannie and Freddie. The operational requirements become effective no later than September 1, 2015 and the financial requirements become effective December 31, 2015. Release. Fannie Mae and Freddie Mac FAQs.

FHFA Releases Update on the Single Security Project

On May 15, the FHFA released an update on the structure of the Single Security, a project involving the development of a single mortgage-backed security that would be issued by Fannie Mae or Freddie Mac. The update contains FHFA's decisions made in response to input previously provided by industry stakeholders. Release. Update.

Rating Agency Developments

On May 22, DBRS released its methodology for rating entities in the real estate industry. Report.

On May 21, DBRS released its methodology for reviewing ratings of Canadian structured finance and covered bond transactions. Report.

On May 20, Moody's released its methodology for rating trade receivables-backed transactions. Report.

On May 20, Moody's released its methodology for rating "credit tenant lease" (CTL) obligations. Report.

On May 20, Moody's released its methodology for rating corporate synthetic collateralized debt obligations (CSOs). Report.

On May 19, Moody's released its methodology for rating commercial mortgage backed securities (CMBS) in Europe, Middle East and Africa (EMEA). Report.

On May 19, Fitch released its updated criteria for rating global aircraft operating lease ABS. Report.

On May 18, Fitch updated its International Local and Regional Government Ratings Criteria. Report.

On May 18, Fitch updated its U.S. Public Power Rating Criteria. Report.

Investment Management

SEC Proposes New Disclosure and Reporting Rules for Investment Companies and Investment Advisers

On May 20, the SEC proposed rules, forms and amendments that, collectively, change the type and format of information required to be disclosed and reported by investment companies and investment advisers

The investment company proposals would enhance data reporting for mutual funds, ETFs and other registered investment companies.  The proposals would require a new monthly portfolio reporting form (Form N-PORT) and a new annual reporting form (Form N-CEN) that would require census-type information.  The information would be reported in a structured data format, which would allow the SEC and the public to better analyze the information.  The proposals would also require enhanced and standardized disclosures in financial statements, and would permit mutual funds and other investment companies to provide shareholder reports by making them accessible on a website.

The proposed amendments to the investment adviser registration and reporting form (Form ADV) would require investment advisers to provide additional information for the SEC and investors to better understand the risk profile of individual advisers and the industry. The proposed amendments to Investment Advisers Act Rule 204-2 would require advisers to maintain records of performance calculations and communications related to performance.

The comment period for the proposed rules will be 60 days after publication in the Federal Register.  ReleaseInvestment Company Proposal.  Investment Advisers Proposal.

RMBS and Other Securities Litigation

US Bank and Bank of America Prevail on Motions to Dismiss

On May 18, 2015, Judge Katherine Forrest of the United States District Court for the Southern District of New York dismissed claims in two suits brought by private investors and the National Credit Union Association, respectively, against U.S. Bank and Bank of America in their capacity as trustees for RMBS trusts. The lawsuits asserted several causes of action arising out of the trustees' alleged failure to fulfill their contractual, statutory, and fiduciary obligations to hundreds of RMBS trusts.

In the first case, brought by a number of institutional investors led by BlackRock, Judge Forrest dismissed claims brought under the federal Trust Indenture Act as to 810 of the 843 trusts at issue because they were governed by Pooling and Servicing Agreements ("PSAs"), rather than indentures, and the TIA does not apply to PSA trusts. She declined to exercise supplemental jurisdiction over the state law claims asserted in connection with the 810 PSA Trusts, holding that allowing 33 indenture trusts to pull in another 810 would allow "a federal tail to wag a state dog." For the remaining 33 indenture trusts, Judge Forrest dismissed the claims because the plaintiffs failed to make a demand on the proper party (the "Owner Trustee") or allege any that such demand would have been futile. Judge Forrest granted plaintiffs leave to amend as to the indenture trusts. Order.

In the second case, brought by NCUA, Judge Forrest dismissed claims as to 74 out of the 82 Trusts at issue on standing grounds. Judge Forrest held that the Amended Complaint failed to demonstrate that NCUA retained any right to sue when it re-securitized its certificates in the 74 trusts as part of the NCUA Guaranteed Note Program. She rejected NCUA's statutory standing argument, holding that 12 U.S.C. § 1787 does not authorize NCUA to sue on behalf of separate statutory trusts created to re-securitize the CCUs' assets. Additionally, Judge Forrest held that the PSAs did not allow third party beneficiary status to extend beyond direct certificateholders, meaning that NCUA no longer had standing once it ceased being a certificateholder following the re-securitization. Order.

Court Enters $806 Million Judgment in FHFA v. Nomura

On May 16, 2015, Judge Denise Cote of the United States District Court for the Southern District of New York entered a judgment requiring Nomura and RBS to buy back, at a total cost of $806 million, seven RMBS certificates sold to Fannie Mae and Freddie Mac from 2005 to 2007. The judgment stemmed from Judge Cote's May 11, 2015 Opinion finding Nomura and RBS liable for violations of the Securities Act of 1933, the D.C. Securities Act, and the Virginia Securities Act. For those certificates for which FHFA prevailed under multiple statutes, FHFA was permitted to, and did, elect the maximum available remedies. Judge Cote also ordered that FHFA is entitled to post-judgment interest, reasonable attorneys' fees, and costs. Judgment.

European Financial Industry Developments

 

ESMA, ISDA, and FIA Europe Publish Capital Markets Union Responses

The European Securities and Markets Authority ("ESMA"), the International Swaps and Derivatives Association ("ISDA") and FIA Europe have published their responses to the European Commission's Green Paper on Building a Capital Markets Union ("CMU").

Whilst supporting the aim of building deeper and more integrated capital markets across all of the EU, ESMA's response stressed how its main objectives of enhancing investor protection and promoting stable and orderly financial markets can contribute to the CMU. The response contains specific proposals for improved access to credit information for SMEs and increasing cross-border retail participation in investment funds such as UCITS. ISDA and FIA Europe's joint response highlights the crucial role derivatives play in capital markets and those derivative reforms in Europe governing clearing, margining and trading activities should be calibrated to a standard that also facilitates the efficient functioning of derivatives markets, without damaging liquidity.

ESMA Responds to Prospective Directive and Securitization Consultations

ESMA has responded to the European Commission's consultations on the Prospective Directive and Securitization, recommending, in relation to prospectuses, an approach that would facilitate access to capital, while stressing the need for maintaining a robust level of investor protection. It argues that the prospectus should be more comprehensible, focusing on the actual purpose of the prospectus while reducing the burden on issuers where possible. On securitization, ESMA emphasized the need to assess the full impact of ongoing reforms, and to provide investors with incentives to conduct adequate risk surveillance, monitor ongoing risks and perform thorough due diligence of their securitization investments.

EBA Outlines Upcoming Initiatives for the Regulation of Retail Payments

The European Banking Authority ("EBA") has announced details of its plans to harmonize regulatory and supervisory practices to ensure secure, easy and efficient payment services across the EU. The Payment Services Directive (PSD2) is expected to mandate improved operational and security requirements for payment services, in close cooperation between the EBA and the European Central Bank (ECB) through the Forum for the Security of Retail Payments which the ECB and the EBA chair jointly. As the security requirements under PSD2 are not expected to come into force until 2018/9, the final Guidelines issued by the EBA in December 2014 (applicable as of August 1, 2015) will apply until such time.

EBA Issues Guidance on the Implementation of Resolution Tools

The EBA has published three sets of final guidelines aimed at facilitating the implementation of resolution tools in the banking sector across the EU. The guidelines have been developed under Articles 39, 42 and 65 of the EU Bank Recovery and Resolution Directive, which mandates the EBA to promote the convergence of supervisory and resolution practices on the effectiveness of the sale of business tool, on the conditions for applying the asset separation tool and on the power to require the provision of services following a transfer under resolution. The guidelines are addressed to Competent Authorities, and provide detailed guidance on the circumstances they should assess when taking their resolution decisions. The guidelines will apply from August 1, 2015.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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