Orrick's Financial Industry Week in Review - October 8, 2012


Financial Industry Developments

CFTC Guidance on Segregated and Secured Funds

On October 4, the CFTC released guidance to registered futures commissions merchants (FCMs) which identifies a situation whereby FCMs may be inappropriately utilizing an omnibus account with their clearing FCM in which they are combining segregated and secured funds in one account.  CFTC Release.  CFTC Guidance.

FHFA Seeks Input on Infrastructure for the Secondary Mortgage Market

On October 4, the FHFA released for public input a white paper on a proposed framework for a common securitization platform and a model Pooling and Servicing Agreement for the residential mortgage market. The white paper seeks to identify the core components of mortgage securitization that will be needed in the housing finance system.  Input should be received by December 3.  FHFA Release.  FHFA White Paper.

FHFA Announces Winning Bidder in Chicago REO Pilot Initiative

On October 2, the FHFA announced that The Cogsville Group, LLC purchased 94 Fannie Mae properties in Chicago as part of the REO pilot initiative.  Fannie Mae will continue to offer pools of properties in U.S. markets that have a strong demand for rental housing and substantial supply of REO housing.  Investors may prequalify for future sales.  FHFA Release.

Rating Agency Developments

On October 3, Moody’s released its methodology for government owned toll roads.  Moody’s Report. 

On October 3, Fitch updated its global criteria for rating structured finance CDOs.  Fitch Release.  Fitch Report.  

On October 3, Moody’s released its approach to credit ratings assigned to revenue bonds of U.S. municipal Joint Action Agencies (JAAs).  Moody’s Report.  

On October 1, S&P released its criteria for assigning CCC+, CCC, CCC- and CC ratings.  S&P Report.

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

Recent Orrick Alerts


Rules Requiring Payment Disclosures by Resource Extraction Issuers

The SEC recently adopted rules to implement Section 13(q) of the Securities Exchange Act of 1934, as amended, requiring resource extraction issuers to disclose certain payments made to the U.S. government or foreign governments (the “Section 13(q) Rules”). The Section 13(q) Rules, which are mandated by the Dodd-Frank Act, target resource extraction issuers, or companies engaged in the development of oil, natural gas, or minerals.  Click here to read more.

Conflict Mineral Disclosure Rules

The SEC recently adopted final disclosure and reporting rules requiring certain public companies to disclose information about their use of “conflict minerals” originating in the Democratic Republic of the Congo (the “DRC”) or an adjoining country. The new rules are mandated by the Dodd-Frank Act and address concerns that trading in conflict minerals by armed groups is helping to finance conflicts in the DRC region and contributing to a humanitarian crisis.  Click here to read more.

RMBS Litigation


New York Attorney General Sues Bear Stearns and JPMorgan Chase

On October 1, New York Attorney General Eric T. Schneiderman filed suit against Bear Stearns & Company, now a unit of JPMorgan Chase, in New York state court in Manhattan.  This is the first suit filed by a member of the joint federal and state Residential Mortgage Backed Securities Fraud Working Group, which was formed in January and is co-chaired by Schneiderman.  The complaint asserts two claims under New York law: securities fraud under Article 23-A of the General Business Law (the Martin Act) and persistent fraud or illegality under Section 63(12) of the Executive Law.  The complaint alleges that Bear Stearns ignored defects in mortgage loans underlying its RMBS, made material misrepresentations to investors about the quality of due diligence, ignored defects identified by due diligence firms, and failed to perform post-purchase quality review.  Losses, according to the complaint, total approximately $22.5 billion across more than 100 subprime and Alt-A securitizations which the defendants sponsored and underwrote in 2006 and 2007.  Complaint.

Massachusetts District Court Grants UBS’s Motion to Dismiss Credit Rating Allegations

On September 28, Judge Denise J. Casper of the federal district court for the District of Massachusetts granted in part and denied in part UBS Securities’s motion to dismiss a complaint concerning its sale of more than $109 million worth of RMBS.  The court concluded that plaintiff Capital Ventures International, an alleged purchaser of the securities, had adequately pleaded that the offering materials contained misstatements and omissions regarding underwriting guidelines, owner-occupancy rates, appraisals, and loan-to-value ratios.  Judge Casper granted, however, UBS’s motion to dismiss as to allegations that either the credit rating agencies or defendants knew that the credit ratings assigned to the securitizations at issue were unjustified.  The Court also dismissed claims against non-underwriter defendants, who the Court determined did not constitute statutory sellers, and held that the control person allegations were insufficient to state a claim.  Decision.

Morgan Stanley Sued Over $110 Million in Mortgage Loans

On September 28, an RMBS trustee sued a Morgan Stanley unit in the Supreme Court for the State of New York, alleging that Morgan Stanley sold RMBS backed by defective mortgage loans.  The trustee asserts that Morgan Stanley breached its contractual obligations by failing to cure or repurchase any of the allegedly defective loans.  Plaintiff’s claims are for breach of contract and it requests specific performance and damages of over $110 million.  Complaint.

Suit Brought Against Deutsche Bank Over $183 Million in Securitized Mortgage Loans

On September 27, HSBC Bank USA, National Association, in its capacity as trustee of ACE Securities Corp. Home Equity Loan Trust, Series 2006-HE4, filed a summons with notice of claims against Deutsche Bank Structured Products, Inc. in the Supreme Court for the State of New York, New York County.  The complaint alleges Deutsche Bank securitized $183 million in mortgage loans that did not conform to the applicable representations and warranties in its mortgage loan purchase agreement and purchase and sale agreement.  HSBC’s claims are for breach of contract and it seeks specific performance of repurchase obligations and/or damages.  Summons with Notice.

GreenPoint Mortgage Sued For Fraud By CIFG

On October 1, CIFG Assurance North America filed a summons with notice against GreenPoint Mortgage Funding Inc. in the Supreme Court for the State of New York, New York County.  The monoline insurer alleges that GreenPoint misrepresented the quality and characteristics of $58 million in residential mortgage loans in the pool backing $277 million in RMBS partially insured by CIFG.  CIFG further alleges that GreenPoint has failed to comply with its contractual obligations to repurchase the allegedly defective loans.  The insurer’s claims are for fraud, breach of contract, and specific performance.  Summons with Notice.

European Financial Industry Developments

European Banking Authority: Final Report on the Recapitalisation of EU Banks

On October 3, the European Banking Authority (EBA) published its final report on the recapitalisation of EU banks.  It also published a set of accompanying questions and answers.  The report confirms that, as of end-June 2012, the majority of the banks within the sample have reached the required 9% core tier 1 ratio, which was first recommended to national supervisory bodies by the EBA in December 2011.  Meeting the required ratio has led to a €115.7 billion recapitalisation of 27 banks across the EU.

The report also includes an announcement that the EBA will issue a new capital conversion recommendation once proposals relating to the fourth Capital Requirements Directive (CRD IV) have been finalised.  This will require that banks maintain a nominal amount of core tier 1 capital which corresponds to the end-June 2012 level of 9%.  Banks will be permitted to go below the required level of capital in only certain limited circumstances, such as de-risking or restructuring.  The ECB will also require that banks submit plans to their supervisory authority explaining how they will implement CRD IV.

Liikanen Report: Structural Reforms of the EU Banking Sector

On October 2, the European Commission published the final report on reforming the structure of the EU banking sector by the high-level expert group chaired by Erkki Liikanen.  The group was established by the Commission in February 2012 in order to assess whether additional reform targeting the structure of individual banks would reduce potential failures and better protect retail clients.

The final report recommends the following steps, which the Commission will consider in light of its proposed legislative reforms:

  • Changing banks’ capital requirements, particularly in the areas of trading assets and loans relating to real estate;
  • Mandatorily separating proprietary trading from other significant trading activities, ensuring that they are legally separate from a deposit bank;
  • Permitting supervisors to require the further separation of activities to aid resolvability;
  • Reforming governance and remuneration arrangements; and
  • Amending certain of the bail in proposals contained in the proposal for the Resolution and Recovery Directive of June 2012.

FSA Consultation on the PRA and FCA Regimes for Approved Persons

On October 3, the FSA published consultation paper 12/26 ‘Regulatory reform: the PRA and FCA regimes for Approved Persons’ (CP12/26). As part of the reform of the supervisory structure of financial services in the UK, the role and functions of the FSA will be passed over to the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).  The PRA and FCA will each adopt sections of the FSA Handbook to create new PRA and FCA rulebooks. Most of the FSA Handbook will be adopted in its current form. Some substantive amendments to the FSA Handbook will be made to align the new rulebooks with the future objectives and functions of the PRA and FCA.   

CP12/26 consults on these substantive amendments, most of which relate to the ‘controlled functions’ which can only be carried out by persons approved by the FSA (‘approved persons’), who must comply with the Statements of Principle and Code of Practice for Approved Persons (APER) in the FSA Handbook.  The main substantive changes consulted on by CP12/26 are:

  • a split of the current list of controlled functions for firms regulated by both the PRA and FCA (dual-regulated firms), seeking to minimise unnecessary duplication for dual-regulated firms; and
  • an extension of the Statements of Principle in APER to a wider set of activities, and their application to people approved by either regulator – meaning that both regulators will have the ability to discipline certain categories of approved person.

 The FSA invites comments by December 7.

FSA Consultation on Proposed Amendments to the Listing Regime

On October 2, the FSA published consultation paper 12/25 ‘Enhancing the effectiveness of the Listing Regime and feedback on CP12/2’ (CP12/25).  In CP12/2 the FSA consulted on proposed amendments to the Listing Rules, Prospectus Rules and Disclosure and Transparency Rules, to maintain the operational effectiveness of the Listing Regime.  In CP12/25 the FSA has published the feedback it received to CP12/2 as well as the final rules to:

  • prevent ‘back-door’ listings of entities that would otherwise not be eligible for listing through the use of reverse takeovers;  
  • ensure the Listing Rules fully reflect the scope and nature of a sponsor’s role;
  • codify existing practice on financial information requirements and transactions, much of which was contained in the UKLA technical notes; and
  • introduce new rules to allow ‘externally managed companies’ (companies where the management of the company is deliberately outsourced to an offshore company to place it outside the controls and protections of the Listing Regime) a transitional period of 15 months to put new arrangements in place, and to remove premium listing status from such structures.  

These new rules will come into effect on October 1, except for the new rules for sponsors and the new rules relating to reverse takeovers and financial information requiring the appointment of sponsors which will take effect on December 31.

The FSA is also using CP12/26 to consult on certain new proposals to:

  • optimise the entry criteria to the Premium segment so as to maintain the strength of the Premium Listing brand;
  • ensure that the eligibility requirements continue to apply as meaningful ongoing obligations;
  • clarify the operation of the free-float provisions; and
  • ensure that shareholders are provided with better quality information. 

In addition, the FSA is consulting on a revised proposal relating to the Alternative Investment Fund Managers Directive (AIFMD) in relation to the potential conflict caused by overlapping obligations imposed by the AIFMD on fund managers and by the Listing Regime on the board of an investment trust.  The FSA invites comments by January 2, 2013.


The JOBS Act in the IPO Market

On October 11, Orrick will host a breakfast briefing that will include a recap of the JOBS Act, a real-time update on the JOBS Act and its impact on the IPO market and early-stage venture capital, and a legal review of the latest SEC guidance and proposed rule-making related to the Act. Keynote Speakers will include Orrick partners Bruce Czachor and Edward Eisert, as well as John Truzzolino, Managing Director at RR Donnelley and Scott Livingston, Officer at Livingston Securities.  For additional information and to RSVP, please click here.


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Orrick, Herrington & Sutcliffe LLP on:

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