Orrick's Financial Industry Week in Review - November 12, 2012


Financial Industry Developments

Federal Reserve Board Launches 2013 Capital Planning and Stress Testing Program

On November 9, the Fed issued instructions, timelines for submissions, and general guidelines for the 2013 capital planning and stress testing program.  The program includes the Comprehensive Capital Analysis and Review, which covers 19 firms, and the Capital Plan Review, which covers an additional 11 bank holding companies.  The goal of the program is to assess these entities’ capital structures to ensure that they have sufficient capital to continue operations during times of economic and financial stresses.  Institutions will be required to submit their capital plans no later than January 7, 2013.  Fed Release.

Joint Agency Guidance on Regulatory Capital Rulemakings

On November 9, the Fed, the FDIC, and the OCC indicated that they do not expect any of the new proposed regulatory capital rules to take effect on January 1, 2013, as was previously suggested in three notices of proposed rulemakings from June.  These new requirements are in connection with the international Basel III capital agreement that has been scheduled to go into effect on January 1, 2013.  Joint Release.

Rating Agency Developments

On November 8, Fitch updated its criteria for ABCP.  Fitch Report.

On November 7, Moody’s updated its approach for incorporating GIC provider ratings in U.S. state revolving fund and pool programs.  Moody’s Report.

On November 7, Moody’s updated its approach to incorporating GIC and swap provider ratings in HFA programs.  Moody’s Report.

On November 7, S&P released its European CMBS methodology and assumptions.  S&P Report.

On November 5, DBRS released its preferred share and hybrid criteria for corporate issuers (excluding financial institutions).  DBRS Report.

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

RMBS Litigation

Motions to Dismiss FHFA’s Claims in Two Actions Granted in Part and Denied in Part

In two separate orders, Judge Cote of the Southern District of New York granted in part and denied in part motions to dismiss claims brought by the FHFA arising out of Fannie Mae’s and Freddie Mac’s alleged purchase of (1) $33 billion of RMBS from several JPMorgan, Bear Stearns, and Washington Mutual entities and (2) $24.9 million of RMBS from several Merrill Lynch entities.  Both actions are among the seventeen brought by the FHFA asserting claims under Sections 11, 12, and 15 of the Securities Act of 1933 and certain state securities laws, and both are also among the six actions that include claims of common law fraud.  

On November 5, in the JPMorgan case, the Court granted certain of the underwriter defendants’ motions to dismiss the state securities law claims as time-barred and inadequately pled.  The Court found that the FHFA’s allegations concerning departures from underwriting guidelines – which were based upon an alleged “forensic review” of loan files, allegations concerning investigations by private entities and government actors, confidential witness allegations, and the rise in defaults in the underlying loans – were sufficient to state a claim, including as to the element of scienter.  With respect to the FHFA’s allegations concerning alleged owner-occupancy and loan-to-value ratio misstatements, the Court reached different results depending on whether the security at issue involved JPMorgan, Bear Stearns, or Washington Mutual.  As to JPMorgan certificates, the FHFA relied solely on the disparity between the ratios as reported in the offering documents and the purported ratios resulting from the FHFA’s analysis, which the Court concluded could not, on their own, establish scienter.  As to the Washington Mutual certificates, the Court found that the FHFA pled adequate additional facts to establish scienter as to the loan-to-value ratios, but not as to owner-occupancy.  As to the Bear Stearns certificates, the Court found sufficient allegations of scienter as to all alleged misrepresentations.  Addressing the defendants’ remaining arguments, the Court found that the FHFA adequately pled justifiable reliance and loss causation, that the FHFA’s claims were not time-barred, and the JPMorgan was an appropriate successor-defendant to Washington Mutual.  JPMorgan Order.

On November 8, in the Merrill Lynch case, the Court likewise granted defendants' motions to dismiss as to the fraud claims based on alleged owner-occupancy and loan-to-value ratio misstatements for failure to adequately allege scienter.  The Court denied all remaining aspects of the motion to dismiss.  In particular, the Court permitted the FHFA to pursue claims against an individual defendant whose signature appeared on an initial shelf registration but not on the amended registration statement filed 18 days later and that was operative when the securities were issued.  The Court also found that the FHFA was not required to plead reliance to state its claims under the Washington, D.C. securities statute and the the FHFA could pursue its demands for rescission and punitive damages.  Merrill Lynch Order.  

Judge Denies S&P’s Motion to Dismiss Claims Brought By Illinois AG

On November 7, Judge Mason of the Circuit Court of Cook County, Illinois ruled that the Illinois Attorney General’s state law deceptive business and trade practice claims against Standard and Poor’s survived S&P’s motion to dismiss.  The Illinois AG alleges that S&P deceived the public by stating that its process for rating securities was independent, objective, and unbiased while in fact S&P permitted a “profit motive” to override its objectivity and independence.  The Court found that the conduct alleged had a sufficient nexus to Illinois to subject S&P to potential liability under the Illinois Consumer Fraud Act.  The Court further found that the alleged misstatements by S&P concerning its independence and objectivity were actionable representations of fact, rather than non-actionable opinions as S&P had argued.  The Court rejected S&P’s arguments that the claims were preempted by federal law and that S&P was exempt from state law under an exemption for “highly regulated” entities.  Finally, the Court ruled that the First Amendment did not shield S&P from liability because the claims concerned statements about the objectivity of the ratings process, not the ultimate ratings opinions.  Order.

Royal Park Investments Sues Bank of America Over $1.6 Billion in RMBS

On October 26, Royal Park Investments filed a summons with notice in New York state court against various Bank of America and Countrywide entities arising out of Royal Park’s alleged purchase of $1.568 billion in RMBS.  Royal Park asserts claims for common-law fraud, fraudulent inducement, negligent misrepresentation, and aiding and abetting fraud.  It alleges that defendants made material misrepresentations and omissions regarding the underwriting standards used in connection with the underlying mortgage loans, the statistical characteristics of those loans, including loan-to-value and combined-loan-to-value ratios and the percentage of owner-occupied properties, the validity of the assignments of the loans to the trusts, and the entitlement of the trusts to receive interest and principal payments on the loans.  Royal Park claims to have suffered, and seeks to recover, at least $713.5 million in damages.  Summons.

Sealink Sues Citigroup over $513 Million in RMBS

Sealink Funding Limited commenced an action against Citigroup Inc. and its affiliates in New York state court by a summons with notice dated November 7, 2012.  Sealink alleges that Citigroup made false and misleading statements in connection with the sale of $513 million in RMBS.  It asserts causes of action for common law fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, and contract claims including rescission, restitution and mutual mistake.  Sealink alleges that defendants made material misrepresentations and omissions regarding the underwriting standards used in connection with the underlying mortgage loans, the statistical characteristics of those loans, including loan-to-value and combined-loan-to-value ratios and the percentage of owner-occupied properties, the validity of the assignments of the loans to the trusts, and the entitlement of the trusts to receive interest and principal payments on the loans.  Sealink seeks $513 million in damages and additional $513 million in punitive damages.  Summons.

European Financial Industry Developments

Short Selling Regulation and Updates to FSA Handbook

On November 1, the Short Selling Regulation (SSR) came into force across the European Union. The SSR applies to the short selling of shares, sovereign debt, sovereign credit default swaps and related instruments that are admitted to trading or traded on an European Economic Area trading venue (unless they are primarily traded on a third country venue). The SSR:

    • requires holders of these net short positions to make notifications once certain thresholds have been breached;  
    • outlines restrictions on investors entering into uncovered short positions; and
    • gives powers to regulating authorities to suspend short selling or limit transactions when the price of various instruments fall by set percentage amounts from the previous day’s closing price.

In line with the coming into force of the SSR, the FSA has published policy statement 12/19 which sets out the resulting changes to the FSA’s Handbook. These changes also came into force on November 1.

The SSR does allow for limited exemptions for certain market making activities in respect of transparency requirements and the restrictions on uncovered short sales. ESMA has consulted on its proposed guidelines in respect of these limited exemptions, and plans to publish its final guidelines by the end of November.

FSB Consults on Guidance for Recovery and Resolution Planning

On November 2, the FSB published a consultation paper on proposed guidance for the recovery and resolution planning for systemically important financial institutions (SIFIs), entitled ‘Recovery and Resolution Planning: Making the Key Attributes Requirements Operational’. The proposed guidance is designed to assist national authorities with implementing the recovery and resolution planning requirements (so-called “living-wills”) set out by the FSB in their paper entitled ‘FSB Key Attributes of Effective Resolution Regimes for Financial Institutions’. Under the Key Attributes, firms are responsible for developing recovery actions to restore financial strength and viability.

The consultation paper builds on the FSB’s experience in this area to date and covers:

    • recovery triggers and stress scenarios to be used by firms in their recovery planning;
    • the development of resolution strategies and associated operational resolution plans tailored to different group structures; and
    • the identification of the critical functions and supporting services that would need to be maintained in a crisis for reasons of systemic stability.

 The FSB invites responses by December 7.

Communiqué of the Ministers of Finance and Central Bank Governors of the G20

On November 6, the Ministers of Finance and Central Bank Governors of the G20 published a communiqué following their meeting on November 4 – 5 in Mexico City. The communiqué stated that the G20 Ministers of Finance remain committed to the full, timely and consistent implementation of the financial regulation agenda, and in particular:

    • welcome the recent decision by European leaders to agree on a legislative framework for a single supervisory mechanism by January 1, 2013;
    • agree to put in place legislation and regulation for OTC derivatives reforms promptly, and to act by the end of 2012 to identify and address issues with the cross border application of existing rules;
    • commit to make the necessary changes to resolution regimes to allow for the resolution of systemically important financial institutions;
    • call for the publication of finalised policy measures for the oversight and regulation of shadow banking in time for the G20 St Petersburg summit on June 8, 2013;
    • are concerned about the slow progress towards a single set of high quality accounting standards; and
    • welcome action taken to address weaknesses and restore confidence in LIBOR and in other benchmark and index setting practices.

SIFMA's 2013 Securitization Conference

On December 6, SIFMA will host its 2013 Securitization Outlook Conference in New York City, which is set to be a timely and informative conference that will bring together a group of academic and industry leaders to discuss:

    • FHFA's strategic plan, single securitization platform and the near-term outlook for the GSEs
    • The status of eminent domain for mortgage loans
    • The regulatory and marker outlook for private-label securitization markets

Orrick partner Howard Altarescu will participate in the panel discussion. For more information, please click here.  


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Orrick, Herrington & Sutcliffe LLP on:

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