Preparing for Potential Inquiries into Designated Lender Counsel in PE Sponsored Syndicated Loans

Recent media reports have expressed alarm at the use of "designated lender counsel" in private equity-sponsored leveraged loan transactions.[1]  The phrase refers to the practice of a private equity firm instructing the investment bank arranging its syndicated loan as to which law firm the private equity firm would like the investment bank to use as the bank's counsel.  According to the press reports, the practice (also known as "sponsor designated counsel") has become prevalent in the syndicated loan market.  The question raised in the press is whether this practice creates a material conflict of interest, because the law firm representing the investment bank arguably generates fees based on the strength of its relationship with the private equity firm across the table.  If it does, the next question is whether that conflict could be argued to adversely affect the lending arrangement, with potential negative consequences for investors in the loan.

The attention this issue is attracting in the media will likely spark regulatory interest as well as interest among participants in the syndicated loan market.  Prominent lead arrangers in the syndicated loan market should expect inquiries from any number of potential government authorities, including the Federal Reserve, the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance Corporation (the "FDIC") and state authorities such as attorneys general and financial supervisory agencies. 

Click here to read our guidance for preparing for potential inquiries and responding to any inquiries made.

[1] Andrew Ross Sorkin, A Growing Conflict in Wall St. Buyouts, N.Y. Times, Jan. 5, 2016, http://www.nytimes.com/2016/01/05/business/dealbook/a-growing-conflict-in-wall-st-buyouts.html?ref=dealbook;

see also Dan Primack, A Private Equity Conflict Grows on Wall Street, Fortune, Jan. 5, 2016, http://fortune.com/2016/01/05/a-private-equity-conflict-grows-on-wall-street/ 

Oil & Gas Bankruptcy Issues: Part 1 Current Industry Situation and Background

In this first of five videos on the oil & gas industry, Orrick Restructuring Chair Ron D'Aversa and Restructuring Partner Doug Mintz discuss changes the industry has seen in recent months and how these changes are affecting oil & gas companies.

Seventh Circuit Holds Section 105(a) Permits Stay of Litigation Against Non-Debtor Affiliates

Section 105(a) of the Bankruptcy Code provides that a bankruptcy court "may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105(a). In the Caesars bankruptcy, the Seventh Circuit explored the breadth of a court's rights to take action under this section. The Seventh Circuit held that section 105(a) permits the Bankruptcy Court to issue an injunction with respect to litigation pending against the debtors' non-debtor parent. The Court of Appeals did not ultimately determine whether the stay should in fact be granted because "that's an issue for the bankruptcy judge to resolve in the first instance;" rather, it held that the Bankruptcy Court and District Court had erred in interpreting section 105(a) too narrowly in denying the stay sought by the debtors. In re Caesars Entm't Operating Co., Inc., No. 15-3259, 2015 WL 9311432 (7th Cir. Dec. 23, 2015). 

For background and analysis, read more here.

Supreme Court to Decide Extent of Puerto Rico's Sovereign Powers

On Wednesday, January 13, 2016, the U.S. Supreme Court will hear arguments in the appeal styled under the caption Commonwealth of Puerto Rico v. Sanchez Valle, No. 15-108. In this case, the Supreme Court is asked to determine whether Puerto Rico and the United States are separate sovereigns for purposes of the Double Jeopardy Clause contained in the Fifth Amendment of the U.S. Constitution. Puerto Rico wants to be able to prosecute crimes in its courts even though the federal government had already prosecuted respondents for those same crimes. In order to do that, Puerto Rico and the United States must be treated as separate "sovereigns." 

To read more, click here.

On January 6, DBRS published its methodology for rating European commercial mortgage loans and European CMBS transactions. Report.

On January 4, DBRS published its preferred share and hybrid security criteria for corporate issuers. Report.

On January 4, DBRS published its methodology for rating holding companies and their subsidiaries. Report.

On January 4, DBRS published its methodology for rating CLOs backed by loans to European Small and Medium-Sized Enterprises (SMEs). Report.

On January 4, DBRS published its methodology for rating European RMBS transactions. Report.

On December 31, DBRS published its methodology for rating European structured finance servicers. Report.

RMBS Claims Against Bank of New York Mellon Remain in Federal Court

On December 18, Judge William Pauley III of the U.S. District Court for the Southern District of New York denied Bank of New York Mellon's motion to dismiss RMBS claims regarding fourteen trusts and one indenture trust for lack of subject matter jurisdiction.  With respect to the indenture trust, the Court held that it did have original jurisdiction over that claim because the federal Trust Indenture Act ("TIA") implicitly creates a private right of action.  Judge Pauley exercised supplemental jurisdiction over plaintiffs' Pooling and Servicing Agreement ("PSA") claims for the remaining fourteen trusts.  Citing Judge Shira Scheindlin's March 31, 2015 decision in BlackRock v. HSBC, Judge Pauley held that both the TIA and PSA claims share a common nucleus of operative fact because all of the trusts at issue in the case were sponsored by Countrywide affiliates and serviced by Countrywide Home Loan Servicing.  Judge Pauley dismissed any concern that allowing a single TIA claim to create jurisdiction over fourteen state law claims would "allow a federal tail to wag a state dog," noting Countrywide's imprint on every transaction as sponsor and servicer.  Judge Pauley also highlighted that the case has been pending in the S.D.N.Y. for over four years and to create parallel proceedings would be both inconvenient and against the interests of judicial economy. Decision. 

Commerzbank AG Sues Four RMBS Trustees Alleging Violations of Duties to Investors

On December 23 and 24, Commerzbank AG filed four actions in the Southern District of New York against Deutsche Bank National Trust Company, HSBC Bank USA, N.A., Wells Fargo Bank, N.A., and the Bank of New York Mellon in their capacities as trustees for a number of RMBS trusts.  Commerzbank, as an RMBS investor, alleges that the trustees violated their contractual, fiduciary, and statutory duties by, among other things, failing to address servicers' "looting" of the trusts.  Commerzbank further alleges that the trustees failed to act to defend the trusts' interest against misconduct by sponsors and originators for the deals at issue.  The complaints in these actions are substantially similar, and closely parallel other RMBS cases alleging violations of the Trust Indenture Act and the Streit Act, as well as breach of contract, breach of fiduciary duty, negligence and breach of the covenant of good faith.  We have previously covered similar suits by the National Credit Union Administration and Pacific Investment Management Company. Representative Complaint.

The PRA Publishes Guidance on Financial Conglomerate Waivers

On January 4, the Prudential Regulation Authority ("PRA") published guidance on the application and supplementary forms that should be submitted by firms requesting a Financial Groups Directive waiver.

The Financial Groups Directive supplements existing sectoral rules with additional requirements for groups with substantial banking/investment and insurance business. Groups are identified as financial conglomerates according to the threshold tests found in the Financial Conglomerates section of the rulebook.

The PRA document is designed to assist firms applying for a financial conglomerate waiver and firms notifying the PRA that a consolidation group is or has ceased to be a financial conglomerate. Document. 

ESMA Publishes Peer Review Report on Compliance with SSR Regarding Market Making Activities

On January 5, the European Securities and Markets Authority ("ESMA") published a peer review report aimed at assessing how national competent authorities ("NCAs") apply the exemption for market making activities foreseen in Article 17 of the Short Selling Regulation (SSR).  The report reviewed whether the NCAs are applying the general principles and criteria of eligibility for the exemption in compliance with the corresponding ESMA Guidelines and to identify good practices.

The report concluded that all NCAs have dedicated resources and have designed processes to handle the notification of exemptions and the notification functions are staffed with capable, knowledgeable and committed staff and that there are a number of approaches taken by NCAs.

The report highlighted some areas for concern, including: NCAs are not properly seeking assurance, in advance, that market makers seeking an exemption comply with the organizational requirement of the ESMA Guidelines; and many NCAs are too reliant on monitoring by trading venues rather than monitoring by the NCAs themselves. Report.

ECB Publishes Its SSM Supervisory Priorities for 2016

On January 6, the European Central Bank ("ECB") published a paper setting out its supervisory priorities in relation to the banks it supervises under the Single Supervisory Mechanism ("SSM").

The ECB's supervisory priorities under the SSM are:

• Business model and profitability risk;
• Credit risk;
• Capital adequacy;
• Risk governance and data quality; and
• Liquidity.

The priorities are not an exhaustive list but are meant to provide an essential tool to coordinate supervisory actions across banks in an appropriately harmonized, proportionate and efficient way, thereby contributing to a level playing field and a stronger supervisory impact. Paper.

SFT Regulation Comes into Force on January 12, 2016

On January 12, the Regulation on Reporting and Transparency of Securities Financing Transactions will come into force ("the SFT Regulation").

Securities financing transactions ("SFTs") allow market participants to access secured funding, in order to secure financing for their activities. This involves the temporary exchange of assets as collateral for a funding transaction.

The SFT Regulation enhances transparency in the shadow banking sector in three ways:

1. Introduction of reporting by any EU financial or non-financial counterparty (excluding SMEs) of all SFTs, except those concluded with central banks, to central databases known as trade repositories. Depending on their category, firms should start reporting at different stages from 12 to 21 months after the entry into force of the relevant regulatory technical standards;
2. Requirement for investment funds to disclose information regarding their use of SFTs and total return swaps to investors in their regular reports and in their pre-contractual documents from the entry into force of the SFT Regulation, while the existing funds with have 18 months to amend them; and
3. Introduction 6 months after the entry into force of the SFT Regulation of some minimum transparency conditions that should be met on the reuse of collateral, such as:
   • Counterparty's consent to the reuse must have been obtained in a written agreement;
   • The potential risks must have been disclosed to the counterparty; and
   • The collateral reused must be shifted away from the account of the counterparty to the account of the re-user.

The provisions relating to reuse apply to all EU entities as well as third country entities which reuse collateral belonging to an EU entity.

On October 29, the Commission also published FAQs on the SFT Regulation.