Orrick's Financial Industry Week in Review - December 16, 2013

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Financial Industry Developments

Final Rules Implementing the Volcker Rule

On December 10, the Fed, CFTC, FDIC, OCC and SEC issued final rules to implement Section 619 of the Dodd-Frank Act (the Volcker Rule), which prohibit insured depository institutions and banking entities from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options for their own account.  Banking organizations covered by the rules will be required to fully conform their activities and investments by July 21, 2015.  Joint ReleaseFinal RulesFact Sheet.

Final Rules on Appraisal Exemptions for Higher-Priced Mortgages

On December 12, the Fed, FDIC, CFPB, FHFA, NCUA and OCC issued a final rule that creates exemptions from certain appraisal requirements for certain higher-priced mortgage loans.  The final rule provides that loans of $25,000 or less and certain "streamlined" refinancings are exempt from the Dodd-Frank Act appraisal requirements, which go into effect on January 18, 2014.  Joint ReleaseJoint Final Rule.

Request for Comment on FDIC Resolution Strategies

On December 10, the FDIC issued a request for comment on its single point of entry strategy for the resolution of Systemically Important Financial Institutions.  Comments must be submitted within 60 days after publication in the Federal Register.  FDIC ReleaseFDIC Request for Comment.

FHFA Increase of Guarantee Fees

On December 9, the FHFA, in connection with its fulfillment of the 'Strategic Plan for Enterprise Conservatorships,' directed Fannie Mae and Freddie Mac to raise their guarantee fees in three separate components: (i) increase the base (or ongoing) fee by 10 basis points; (ii) update the upfront grid to better align pricing with the credit risk characteristics of the borrower; and (iii) eliminate the upfront 25 basis point adverse market fee except in the four states where foreclosure carrying costs are more than two standard deviations greater than the national average.  For loans exchanged for MBS, the price changes will be effective starting April 1, 2014.  For loans sold for cash, the price changes will be effective starting March 1, 2014.  FHFA Release.

Supervisory Approach for Qualified and non-Qualified Mortgage Loans

On December 13, Fed, FDIC, NCUA and OCC issued a statement to clarify safety-and-soundness expectations in order to guide institutions engaged in residential mortgage lending as they assess the implementation of the CFPB's Ability-to-Repay and Qualified Mortgage Standards Rule, which is effective January 10, 2014.  Joint ReleaseJoint Statement.

Rating Agency Developments

On December 12, Moody's released its methodology for rating intellectual property ABSMoody's Report.

On December 12, Fitch released its criteria for rating pooled multifamily housing bonds.  Fitch Report.

On December 11, Fitch released its criteria for surveillance of existing U.S. CMBS fixed-rate and multi-borrower transactions.  Fitch Report.

On December 9, DBRS issued a request for comment on rating CLOs and CDOs of large corporate credit.  Comments must be received by January 6, 2014.  DBRS Report.

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

Asset Management

Guidance on the Exemption for Advisers to Venture Capital Funds

The Division of Investment Management of the SEC recently issued Guidance on the Exemption for Advisers to Venture Capital Funds under five different scenarios.  The Guidance generally provides that the fund structures or actions described will not jeopardize the ability of advisers to rely upon the venture capital fund adviser exemption.  Guidance Update

New Compliance and Disclosure Interpretations

On December 4, the Division of Corporation Finance of the SEC issued new Compliance and Disclosure Interpretations regarding, among other things, Rules 506(d) and (e) of Regulation D under the Securities Act of 1933.  These rules prohibit issuers from conducting private placements that rely on Rule 506 if felons and other "bad actors" participate in the offering.

Section 260 of the Interpretations addresses questions arising under "Rule 506 - Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering."  Interpretations.

RMBS and Other Securities Litigation

Goldman Sachs Motion to Dismiss RMBS Fraud Suit Granted in Part, Denied in Part

On November 26, Justice Melvin Schweitzer of the New York Supreme Court granted in part and denied in part Goldman Sachs's motion to dismiss a lawsuit brought by HSH Nordbank.  Justice Schweitzer dismissed claims arising out of alleged misstatements regarding assignment and transfer of the mortgages underlying the RMBS at issue and the credit ratings assigned to the RMBS, holding that HSH Nordbank had not adequately alleged such statements were knowingly false when made.  Justice Schweitzer also dismissed HSH Nordbank's negligent misrepresentation claim, finding no special duty between Goldman Sachs and HSH Nordbank that could support such a cause of action.  Justice Schweitzer allowed the remaining claims and allegations to proceed, including claims for fraud, fraudulent concealment, aiding and abetting fraud and rescission.  In particular, he denied Goldman Sachs's argument that the lawsuit was time-barred under German law, hold that HSH Nordbank's knowledge of the existence of its claims was a question of fact not capable of resolution at the pleading stage.  Justice Schweitzer also held that the complaint adequately alleged misrepresentations concerning compliance with underwriting guidelines, loan to value ratios and occupancy status.  Order

PNC Bank and Freddie Mac Reach Settlement Agreement

On December 6, PNC Bank announced an agreement in principle to an $89 million dollar settlement agreement with Freddie Mac resolving outstanding and potential repurchase claims arising out of the sale of some 900,000 loans to Freddie Mac between 2000 and 2008.  The settlement also covers existing and future claims for losses due to denials, rescissions or cancellations of mortgage insurance.  Press Release

U.S. Bancorp Announces $53 Million Settlement with Freddie Mac

On December 10, U.S. Bancorp announced a $53 million settlement with Freddie Mac. The Settlement resolves nearly all of U.S. Bancorp's repurchase obligations pertaining to loans sold to Freddie Mac during the period between 2000 and 2008.  Press Release.

European Financial Industry Developments

Lloyds Banking Group Face £28 Million Fine in Relation to Sales Incentive Controls

On December 11, the FCA published a final notice to Lloyds Banking Group in which it was fined a record GBP £28 million.  The fine was imposed for "serious failings" in its sales practices, the largest UK regulatory penalty for a retail banking misdemeanor. The FCA was particularly critical of "seriously flawed" sales practices and bonus structures in place between January 2010 and March 2012 that involved sales people being potentially demoted, with a potential cut in salary of up to 50 percent, if they failed to hit targets.  Final Notice.

Speech on FCA Priorities Relating to Asset Management, MiFID II and EMIR

On September 12, the FCA published a speech by Martin Wheatley, FCA Chief Executive, on the FCA's plans for 2014, which focus on issues relating to asset management, MiFID II and EMIR (the Regulation on OTC derivatives, central counterparties and trade repositories) (Regulation 648/2012).  Speech.

UK House of Lords EU Committee Report on European Commission's Financial Transaction Tax Proposals

On December 10, the UK House of Lords EU Sub-Committee on Economic and Financial Affairs published a follow-up report to its March 2012 report on the European Commission's proposals for a financial transaction tax (FTT).

The Committee's report identifies "serious" flaws with the Commission's use of enhanced cooperation, including the adverse impact on institutions in non-participating member states, such as the UK.  Report.