Orrick's Financial Industry Week In Review - April 2, 2013


Financial Industry Developments

CFTC No-Action Relief for Commodity Trader Advisor Registration

On March 29, the CFTC issued a no-action letter providing relief, in certain circumstances, from registration as an introducing broker or a commodity trading advisor for certain affiliates of a swap counterparty and certain employees of the affiliate.  CFTC Release.   

CFTC Regulations on Associated Persons of Swap Dealers and Major Swap Participants

On March 29, the CFTC approved final regulations governing dual and multiple associations of associated persons of swap dealers, major swap participants and other CFTC registrants.  CFTC Release.   

CFTC No-Action Relief for Compliance Reporting

On March 28, the CFTC issued a no-action letter providing limited relief, in certain circumstances, from the requirement that chief compliance officers of futures commission merchants prepare and submit an Annual Report.  CFTC Release.   

FHFA Streamlined Modification Initative

On March 27, the FHFA announced that Fannie Mae and Freddie Mac will offer a new streamlined loan modification initiative.  Beginning July 1, servicers of Fannie and Freddie mortgage loans will be required to offer modifications to borrowers who are at least 90 days delinquent.  FHFA Release.  Fannie Mae Guidance.  Freddie Mac Guidance.

Rating Agency Developments

On March 29, Moody's issued its methodology for U.S. municipal pool program debt.  Moody's Report.

On March 28, Fitch updated its criteria for rating global small- and medium-sized enterprises CLOs.  Fitch Report.

On March 26, Fitch updated its criteria for rating money market funds.  Fitch Report.

Note: Free registration is required for rating agency releases and reports.

Asset Management

SEC Issues FAQs Regarding Rule 15a-6 and Foreign-Broker Dealers

On March 21, the Staff of the  Division of Trading & Markets of the SEC published a set of FAQs on Rule 15a-6 under the Securities Exchange Act of 1934, which provides conditional exemptions from Exchange Act broker-dealer registration requirements for foreign broker-dealers that engage in specified activities involving U.S. investors.  Among the topics covered are distribution of research to U.S. institutional investors, delivery of confirmations and account statements directly to U.S. counterparties, and the application of prior no-action guidance to chaperoning arrangements with non-affiliated broker-dealers.  SEC FAQs.

Recent Orrick Alerts

Final Regulations Implementing the Foreign Account Tax Compliance Act

On January 17, 2013, the Internal Revenue Service (IRS) released final regulations (the Final Regulations) implementing the reporting and withholding provisions of the HIRE Act (commonly known as the Foreign Account Tax Compliance Act, or FATCA, provisions) that target noncompliance by U.S. taxpayers using foreign accounts.  The Final Regulations build on proposed regulations published on February 15, 2012, to provide additional certainty for financial institutions and government counterparts by finalizing the step-by-step process for U.S. account identification, information reporting and withholding requirements for foreign financial institutions (FFIs), non-financial foreign entities (NFFEs) and U.S. withholding agents.  For more information, please click here.

RMBS Litigation

Monoline Insurer Assured Sues RBS in Connection with $1.15 Billion RMBS Securitization

On March 26, Assured Guaranty Municipal Corp. sued RBS Securities in the United States District Court for the Southern District of New York for fraud in connection with a financial guaranty insurance policy that Assured provided to RBS as part of a $1.15 billion RMBS securitization.  Assured alleges that it was induced to insure the certificates by RBS's alleged material misrepresentations and omissions, including the loan-to-value and borrower-to-income ratios of underlying mortgages, owner occupancy status and adherence to originator underwriting standards.  Assured alleges that it expects to pay $100 million in claims by investors in the securitization.  Assured brings claims for common law fraud, aiding and abetting common law fraud and civil conspiracy to defraud, all under New York law.  Complaint.

Court Denies in Part Motions to Dismiss FHFA's Claims Against Countrywide and Various Underwriters

On March 15, Judge Mariana Pfaelzer of the United States District Court for the Central District of California denied in part motions to dismiss brought by Countrywide, various individuals and various underwriters in connection with an amended complaint brought by the Federal Housing Finance Agency in connection with the sale of $26.6 billion in RMBS.  Countrywide and its affiliates are alleged to have acted as issuer, originator and depositor in connection with the securitizations.  The court held that FHFA plausibly alleged that the offering documents concerning the sale of the RMBS contained material misrepresentations and omissions regarding loan-to-value ratios, underwriting guidelines and credit ratings of the RMBS, but dismissed FHFA's allegations involving owner-occupancy data.  The court dismissed claims of negligent misrepresentation and aiding and abetting fraud as to all defendants, claims under Washington, D.C.'s blue sky law and Section 12(a)(2) of the Securities Act of 1933 against subsidiaries of Countrywide that were depositors, successor liability claims against Bank of America and claims under Section 11 of the Securities Act of 1933 against the Individual Defendants.  Among the claims that survived the motions to dismiss are claims under Sections 11 and 12(a)(2) against the underwriter defendants and a common law fraud claim against the Countrywide defendants.  Defendants initially had filed first-stage motions to dismiss FHFA's claims on timeliness and legislative jurisdiction grounds, which the court denied last year.  Order.

European Financial Industry Developments

The FSA and the Bank of England Publish Joint Review of Requirements to Enter Banking Sector

Coming as part of a UK government initiative to increase competition within the banking sector, the joint review covers reforms to the authorization process and prudential requirements for new banks.  Authorizations will be divided into two pathways, one suitable for firms which already have the means to set up a bank quickly, and the other involving a 3 stage incremental process intended for firms with fewer resources.  This will mean that less well resourced firms can receive an initial (although restricted) authorization without having to commit to assembling the onerous capital, IT and infrastructure requirements.

Turning to prudential requirements, the UK's forthcoming prudential regulator, the PRA, will take a pragmatic view towards setting the capital requirements for new banks.  This will involve temporarily allowing new banks to hold leaner capital barriers than their larger, more established competition, in recognition of the lower systemic risk they pose.

A number of the reforms set out in the review have already been implemented by the FSA, and the remainder will be implemented after the UK financial regulation legal cutover date on April 1, 2013. 

The FSA Fines Prudential £30m over its Failed $35.5bn Bid for AIA

The fine has been levied for Prudential's failure to inform the FSA that it was seeking to acquire the Asian arm of AIG at an appropriate time, in breach of FSA Principles and UKLA Listing Principles.  Prudential should have notified the FSA of its intentions at the earliest opportunity, so that the regulator could decide whether to approve or reject the deal on regulatory grounds.  But according to an FSA news release, Prudential failed to reveal its intentions to the FSA even when quizzed on its plans for expansion in Asia.  The delay in notification, which finally came after a press leak, meant that the FSA was forced to rush its analysis of the proposed deal.

In addition to the fine, the FSA also censured Prudential CEO Tidjane Thiam, although it stopped short of finding any lack of fitness or propriety on his part. 

Cyprus Agrees to Bailout Terms

Cyprus has come to an agreement with the European Union and the International Monetary Fund (IMF) for a €10bn bailout in an attempt to avoid the collapse of its banking sector and the impact that would have on the wider economy.  The agreement has resulted in banks in Cyprus re-opening after a two week closure.  Despite initial concerns that there would be a rush to withdraw deposits, bank branches have remained relatively calm.

The terms of the bailout agreement require a significant restructuring of the Cypriot banking sector and put in place various other measures, including increases to taxes and privatizations.  Cyprus's second largest bank, "Laiki Bank," will be forced to shut down, and all deposits over €100,000 will be moved into a "bad bank."  Deposits under €100,000 will be moved to Cyprus's largest bank, the "Bank of Cyprus," which will also be subject to restructuring.  Amounts over €100,000 deposited at either bank will be converted into bank shares or "bailed in."


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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