Orrick's Financial Industry Week in Review - November 21, 2011


Financial Industry Developments


SEC Extends NRSRO Extraterritorial Exemption from Rule 17g-5

On November 16, the SEC extended the temporary conditional exemption for NRSROs from complying with Rule 17g-5(a)(3) for rating covered transactions until December 2, 2012. Rule 17g-5(a)(3) requires that an NRSRO must maintain a password-protected website containing the information provided to it by the arranger for each structured finance product for which it is in the process of determining a credit rating.  Under the exemption, an NRSRO is not required to comply with Rule 17g-5(a)(3) where: (i) the issuer is a non-U.S. person and (ii) the NRSRO reasonably believes that the structured finance products will be sold only outside of the U.S. SEC Release.

UCC Permanent Editorial Board Report on Mortgage Notes

On November 14, the Permanent Editorial Board for the Uniform Commercial Code issued a report on the application of the UCC to selected issues relating to mortgage notes. The report is intended to provide guidance on: (i) identifying the person who is entitled to enforce the payment obligation of the maker of a mortgage note, and to whom the maker owes that obligation; and (ii) determining who owns the rights represented by the note and mortgage. UCC Report.

Multi-Agency Statement on Supervisory and Enforcement of Consumer Financial Laws

On November 17, the Fed, Consumer Financial Protection Bureau, FDIC, NCUA, and OCC issued a supervisory statement to provide clarity and transparency as to the determination of the total assets of an insured depository institution or an insured credit union for the purposes of supervision and enforcement responsibilities under Sections 1025 and 1026 of the Dodd-Frank Act. The agencies have indicated that they will use the total assets reported in a depository institution's required quarterly reports of condition, or Call Reports to determine an institution's asset size for these purposes and that they will follow the FDIC's deposit insurance assessment methods to determine whether an institution should be classified as a "Large Institution". Multi-Agency Release. Supervisory Statement.

Rating Agency Developments


On November 17, S&P requested comments on proposed project finance transaction structure methodology.  Comments must be submitted by December 20. S&P Release.

On November 16, S&P updated its methodology for determining oil and natural gas price assumptions. S&P release.

On November 16, Fitch released its surveillance methodology for U.S. fixed rate CMBS. Fitch Report.

On November 15, Fitch released its updated criteria for analyzing securities backed by French residential loans. Fitch Report.

On November 15, S&P released its methodology and assumptions for global financial future flow transactions. S&P Release.

Note: Free registration is required for Fitch and S&P releases and reports.  

RMBS Litigation


Texas Bank Sues Underwriters and Investment Advisor Over RMBS

On November 11, 2011, Town North Bank NA filed a complaint in the federal district court for the Northern District of Texas against UBS Financial Services Inc., Morgan Stanley & Co. LLC, Merrill Lynch & Co., LLC, J. P. Morgan Securities LLC as successor to Bear Stearns & Co., Inc., and Shay Financial Services, Inc. (Town North's investment advisor). Town North seeks $113 million in damages, alleging that the defendants misrepresented that the mortgage loans underlying RMBS that it purchased complied with underwriting guidelines, overstated the borrowers' capacity to repay their mortgage loans, and failed to disclose the quality of loans underlying the securities and their risk of loss. Town North asserts causes of action under Section 10(b) of the Securities and Exchange Act, state law fraud, and breach of fiduciary duty (against Shay Financial only). Complaint.

NCUA Settles with Citigroup and Deutsche Bank in RMBS Dispute

The National Credit Union Administration ("NCUA"), an independent federal agency that supervises and charters federal credit unions, reached a $145 million settlement with Deutsche Bank and a separate $20.5 million settlement with Citigroup, stemming from the banks' sales of RMBS to five failed credit unions. The NCUA did not file a lawsuit against either Citigroup or Deutsche Bank, although the NCUA currently has RMBS suits pending against three other financial institutions. Press Release 1. Press Release 2.

European Financial Industry Developments


ESMA Provides Technical Advice on the Level Two Implementation of the Alternative Investment Fund Managers Directive

On 16 November 2011, the European Securities and Markets Authority ("ESMA") published its final advice to the European Commission (the "Commission") on possible implementing measures under the Alternative Investment Fund Managers Directive (the "Directive"). Although ESMA's advice is extensive (over 500 pages), there are some headline issues. There is growing industry concern that ESMA's advice supports a "strict liability" approach towards depositaries for the acts and omissions of their sub-custodians. The industry is likely to welcome other elements of the advice including ESMA's proposal that where portfolio or risk management is delegated to an entity outside the EU, that entity need not be subject to regulatory requirements which are identical to those under the Directive. 

ESMA's Technical advice can be read in full by clicking here

Commodities and Futures Trading Commission Offers First Draft Definition of High Frequency Trading

Scott O'Malia, a commissioner for the Commodity Futures Trading Commission, has proposed a seven-part test to be used as "building blocks" towards defining "high-frequency trading". Mr. O'Malia suggests that an established definition of "high frequency trading" would form the first part of a three-stage regulatory approach aimed at addressing the acceleration of technologies in futures markets. It is unclear how these principles would work in practice or whether all of the requirements would need to be fulfilled to constitute "High Frequency Trading". 

The full text of Mr. O'Malia's letter can be found here



PLI's New Developments in Securitization 2011

On December 1 - 2 in New York, Orrick partner Mike Mitchell will be presenting at this two-day program that will examine legislative and regulatory actions underway and provide a comprehensive overview of various market responses. Click here to learn more and register.


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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