Orrick's Financial Industry Week In Review - September 10, 2012


Financial Industry Developments

Increase in Fannie Mae and Freddie Mac Guarantee Fees

On August 31, the FHFA announced that it has directed Fannie Mae and Freddie Mac to raise guarantee fees on single family mortgages by an average of 10 basis points.  For loans exchanged for mortgage-backed securities, the increases will be effective with settlements starting December 1.  For loans sold for cash, the increases will be effective with commitments starting November 1.  FHFA Release.  

SEC Risk Alert on Pay-to-Play and MSRB

On August 31, the SEC issued an alert on compliance with MSRB Rule G-37, which limits political contributions by municipal securities professionals to campaigns of public officials of issuers with whom they are doing or seek to do business.  The SEC’s concerns include: (i) compliance with the rule’s ban on doing business with a municipal issuer within two years of a political contribution to officials of the issuer by any of the firm’s municipal finance professionals; (ii) possible recordkeeping violations; (iii) failure to file accurate and complete forms with regulators; and (iv) inadequate supervision.  SEC Release.  SEC Risk Alert.

European Commission Consultation on Benchmarks and Market Indices

On September 5, the European Commission launched a consultation inviting stakeholders to comment on possible new rules for the production and use of indices servicing as benchmarks in financial contracts.  The consultation covers all benchmarks, including commodities and real estate price indices, in addition to interest rate benchmarks such as LIBOR.  The consultation will run through November 15.  EC Release. EC Consultation.

Rating Agency Developments

On September 5, S&P released its methodology for U.S. and Canadian CMBS.  S&P Report. 

On September 5, S&P released its CMBS global property evaluation methodology.  S&P Report. 

On September 5, DBRS released its criteria for holding companies and their subsidiaries.  DBRS Report.

On August 31, DBRS released its solar power project criteria.  DBRS Report.

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

Asset Management

FINRA Rule Requiring Filing of Private Placement Offering Documents

On September 5, the SEC approved new FINRA rule 5123 requiring each member firm that sells an issuer’s securities in a private placement to file with FINRA a copy of any private placement memorandum, term sheet or other offering document within 15 days of the date of sale.  The rule exempts some private placements sold solely to qualified purchasers, institutional purchasers and other sophisticated investors.  The rule becomes effective on December 3.  FINRA Notice and Rule.

RMBS Litigation

Second Circuit Permits Expansive Class Standing for RMBS Purchasers

On September 6, 2012, the United States Court of Appeals for the Second Circuit reversed the dismissal of RMBS claims against Goldman Sachs and related entities based on lack of standing and failure to state a claim.  The court addressed a named plaintiff’s standing to assert class claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 based on mortgage-backed securities from offerings or tranches it did not purchase.  Reversing the district court’s decision, the Second Circuit held that plaintiffs have standing to represent classes of investors who purchased mortgage-backed securities from different tranches than those purchased by the named plaintiff, or even under different prospectus supplements, as long as the securities were backed by mortgages originated by the same lenders and the claims are based on “similar or identical misrepresentations in the Offering Documents.”  The court also held that the plaintiff had adequately pled a decline in the value of the securities, despite the absence of any allegation that the relevant trusts had defaulted on any distribution of principal or interest.  Decision.

WaMu Settles RMBS Suit for $26 Million

On September 4, 2012, named plaintiffs Doral Bank of Puerto Rico, Policeman’s Annuity Benefit Fund of the City of Chicago and Boilermakers National Annuity Trust moved for approval of a $26 million settlement with Washington Mutual in an action for alleged violations of Sections 11, 12, and 15 of the Securities Act.  Plaintiffs brought the class action against specific WaMu divisions alleging that RMBS offering documents contained material misstatements about the underwriting quality of the underlying loans.  Plaintiffs originally sought more than $550 million in the suit.  Motion.

German Bank Sues Goldman Sachs and Citigroup for a Total of $210 Million

On September 5, 2012, German bank IKB Deutsche Industriebank AG filed summonses with notice against Goldman Sachs and Citigroup in the Supreme Court of the State of New York, New York County claiming $210 million in losses.  In two separate actions, the bank alleges that Goldman Sachs and Citigroup provided offering materials that misrepresented or omitted material information about the originators’ underwriting practices, the transfer of loans to the relevant trusts, and the ability of the trusts to recoup interest and principal on the loans.  IKB asserted claims for fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, rescission, restitution, and mutual mistake.  Goldman Sachs Complaint.  CitiGroup Complaint.

Irish Financial Firm Sues UBS Alleging RMBS Misrepresentations

On September 5, 2012 Sealink Funding Limited filed a summons with notice against UBS AG in the Supreme Court for the State of New York for allegedly misrepresenting the nature of nearly $160 million worth of RMBS securities.  Sealink alleges misrepresentations and omissions regarding underwriting standards, transfers of loans to the trusts, loan-to-value ratios, owner-occupied status, and credit ratings.  The causes of action are for fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation, declaratory judgment, rescission, restitution, and mutual mistake.  Summons with Notice.

Israel’s Largest Bank Sues Morgan Stanley for $281 Million

On August 29, 2012, Bank Hapoalim B.M. filed a summons with notice for a case against Morgan Stanley and related entities in the Supreme Court of New York for allegedly making knowing misrepresentations and omissions in offering materials concerning the loans pooled into $140 million worth of RMBS issued between September 2006 and June 2007 in eight RMBS securitizations.  The causes of action are for fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation, declaratory judgment, breach of contract, rescissory damages, and violations of the Securities Act of 1933.  Summons with Notice.

European Financial Industry Developments

FSA Publishes a Guidance Consultation on the Risks to Customers from Financial Incentives

On 5 September 2012, the FSA published a guidance consultation on the risks to customers from financial incentives (GC 12/11).

GC 12/11 includes proposed guidance for firms on:

  • incentive scheme features that increase the risk of mis-selling; and
  • managing the risks and governance of incentive schemes.

The publication of GC 12/11 marks the launch of what the FSA is calling its initiative to outlaw flawed sales bonuses that encourage mis-selling and was accompanied by the publication of a speech by Martin Wheatley (Managing Director, FSA and chief executive officer designate, FCA) entitled ‘The incentivisation of sales staff – are consumers getting a fair deal?’.  In his speech Mr. Wheatley explained that the FSA’s initiative – in which he would be taking a lead role – was aimed at ensuring that financial institutions view their customers as people to be served, as opposed to people “to sell to”.

The FSA invites firms to respond to GC 12/11 by 31 October 2012.

FSA Consults on Proposals to Change Client Money and Custody Assets Regime

On 6 September 2012, the FSA published a consultation and discussion paper proposing changes to the client money and custody assets regime for firms undertaking investment business.  The paper is split into three parts:

  1. A consultation on changes to the FSA’s client assets regime to bring them into line with EMIR’s segregation and portability requirements.
  2. The introduction of proposals to permit investment firms to operate multiple client money pools that will be legally and operationally separate.
  3. An overview of the FSA’s review of its client assets regime, focusing on ways to improve the regime in the event that an investment firm becomes insolvent.

The proposed introduction of client money sub-pools is considered by the FSA to potentially be the most radical change in the client assets regime in over two decades.

The deadline for comments on Part I is 16 October 2012, with comments on Parts II and III required by 30 November 2012.  The FSA anticipates the publication of a feedback statement on Part I during December 2012, with feedback on Parts II and III to be provided in the first half of 2013

European Commission Consults on the Regulation of Benchmarks and Market Indices

On 5 September 2012, the European Commission published a consultation document seeking views on issues relating to a possible framework for the regulation of the use and production of indices serving as benchmarks in financial and other contracts.  The consultation follows the recent revelations regarding the alleged manipulation of the LIBOR and EURIBOR benchmarks.

The Commission has requested views on the following points:

  • Information on indices and benchmarks – their definition, their purposes, the methodology behind their production and the persons who produce them.
  • Governance and transparency issues concerning the calculation of benchmarks, including data usage and persons contributing such data.
  • The use and purposes of benchmarks.
  • The ways in which private and public bodies provide benchmarks.
  • The potential impact of regulating benchmarks, including the international issues that will need to be considered.

 The Commission has requested comments on the consultation by 15 November 2012.

Council of the European Union Publishes Compromise Proposals on MiFID, MiFIR and MAR

The Presidency of the Council of the European Union has published compromise proposals on the: 

  • MiFID II Directive (dated 31 August 2012);
  • MiFIR Regulation (dated 31 August 2012); and
  • The proposed regulation on insider dealing and market manipulation (MAR) (dated 3 September 2012).

These compromise proposals are marked up to show the changes made as against the previous versions.


Written by:


Orrick, Herrington & Sutcliffe LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:

Sign up to create your digest using LinkedIn*

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.

Already signed up? Log in here

*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.