Orrick's Financial Industry Week in Review - March 11, 2013

by Orrick, Herrington & Sutcliffe LLP
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Financial Industry Developments

SEC Risk Alert and Investor Bulletin on Investment Adviser Custody Rule

On March 4, the SEC issued a Risk Alert on compliance with its custody rule for investment advisers and an Investor Bulletin on the rule which is designed to protect advisory clients from theft or misuse of their funds and securities.  The alert comes after a review which identified significant deficiencies in about one-third of firms examined, including: (i) failure to recognize that they have custody; (ii) failure to meet surprise examination requirements; and (iii) failure to satisfy the rule's qualified custodian requirements.  SEC Release.  

FHFA Outlines 2013 Goals for Fannie and Freddie

On March 4, the FHFA released the 2013 Conservatorship Scorecard for Fannie Mae and Freddie Mac.  The Scorecard details specific priorities for the GSEs in 2013 that build upon the strategic goals announced in 2012, including: (i) build a new securitization infrastructure; (ii) contract the GSEs' dominant presence in the marketplace; and (iii) maintain foreclosure prevention activities and credit availability.  FHFA Release.   

Rating Agency Developments

On March 8, Fitch updated its report on dual-party criteria for long-term ratings on letter of credit-supported U.S. public finance bonds.  Fitch Report. 

On March 7, Moody's released its approach to quantifying set-off risk for Belgian structured finance and covered bond transactions.  Moody's Report.

On March 5, Moody's released its methodology for rating transactions based on credit substitution through financial guaranty assistance, letters of credit, and third party guarantees.  Moody's Report.

On March 4, Fitch released its Canadian residential mortgage loss model criteria.  Fitch Report.

On March 4, Fitch updated its non-U.S. public sector entities criteria.  Fitch Report.

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

Asset Management

SEC Proposes Rules to Improve Systems Compliance and Integrity

On March 7, the SEC proposed Regulation SCI to require certain SROs, alternative trading systems, disseminators of market data under certain National Market Systems plans and clearing agencies exempt from SEC regulation to have comprehensive policies and procedures in place surrounding their technological systems.  The proposed Regulation SCI would replace the current voluntary compliance program with enforceable rules designed to better insulate securities markets from vulnerabilities posed by systems technology issues.  Comments must be submitted within 60 days after publication in the Federal Register.  SEC Release.  SEC Proposed Rules.

RMBS Litigation

Washington State Court Strikes Jury Demands in RMBS Case

On March 7, Judge Laura Inveen of the King County Superior Court in Washington State granted the motion to strike jury demands filed by defendants in 11 RMBS actions brought by the Federal Home Loan Bank of Seattle.  Judge Inveen ruled that claims for rescission or rescissionary damages under the Washington State Securities Act are equitable in nature and thus not eligible to be tried to a jury.  Orrick successfully briefed and argued the motion.  Order.

Investor Files Suit Against Nationstar Over Mortgage Auctions

On March 7, KIRP, LLC sued Texas-based mortgage servicer Nationstar Mortgage LLC in the Supreme Court of the State of New York in connection with Nationstar's alleged improper conduct in servicing mortgage loans that are collateral for RMBS certificates owned by KIRP.  Specifically, KIRP alleges that Nationstar auctioned off defaulted mortgages loans at prices far below the loans' value in breach of Nationstar's obligations under its master servicing contract.  KIRP further alleges that Nationstar conducted these auctions to recoup advances Nationstar made to troubled borrowers, in breach of its duties to place the interests of certificate holders above its own interests.  KIRP purports to sue on behalf of all certificate holders in the six RMBS trusts at issue.  KIRP asserts claims for breach of contract, conversion, unjust enrichment and declaratory judgment, and seeks a temporary restraining order, disgorgement of profits, damages, interest and reimbursement of costs and expenses.  Complaint.

European Financial Industry Developments

EBA Issues Good Practices for Banks' ETF Risk Management

On March 7, the European Banking Authority (EBA) issued an opinion addressed to National Supervisory Authorities (NSAs) on good practices for credit institutions in their risk management of exchange traded funds (ETFs).

The EBA's opinion aims to assist bank supervisors in assessing risk when participating in ETF businesses, by setting out high level descriptions of non binding good practice and guidance in relation to managing the key risks encountered by credit institutions.  The opinion specifically focuses on funding requirements and liquidity, credit risk and collateral management and market risk.  The EBA has noted that how credit institutions choose to implement good practice will differ depending on their individual characteristics and their exact involvement with ETFs.  

FSA Report Relating to the LIBOR Scandal

On March 5, The FSA published a report and management response concerning the manipulation of LIBOR.  The report finds that the FSA was aware of disruption in the LIBOR market during the period between summer 2007 and early 2009, but such disruption may have been solely caused by volatile market conditions at the time.  Nevertheless, the report concludes that the FSA should have considered whether manipulation of the benchmark interest rate was taking place.

The report recommends improvements in the sharing of intelligence between the soon to be established new financial regulatory authorities (FCA and PRA), to ensure that future indications of misbehavior in the LIBOR market are not ignored or missed.

An investigation by the Serious Fraud Office into the manipulation of LIBOR, which has so far resulted in the arrest of three men, is ongoing. 

OFT Launches Review into Payday Lending

On February 24, the OFT launched a review  of the payday lending sector, to be carried out alongside enforcement actions being taken within the payday lending sector, as a result of concerns that certain payday lenders were taking advantage of people in financial difficulty.

The OFT will carry out on-site investigations of 50 major payday lenders and review whether they are complying with both the Consumer Credit Act and its guidance on irresponsible lending.  The review will focus on: (i) loans which are given to borrowers without sufficient evaluation of repayment likelihood; (ii) inappropriate targeting of groups; and (iii) rolling loans which result in escalating charges.

The OFT intends that the review will increase industry standards, improve customer protection and force non compliant payday lenders to give up their licenses. 

Events

Solar Power Finance & Investments Summit 2013

March 18-21, 2013 -- The major gathering place for the solar power industry's decision makers, the summit attracts key dealmakers in the solar development and financial communities to network and conduct business in San Diego, CA.  Orrick is a Platinum Level Sponsor.  On March 18, Howard Altarescu, Chair of the Solar Securitization Workshop, will present Structural & Legal Considerations in Solar Securitizations.  Eric Stephens and Michael Meyers will also moderate panels.  Click here to view the current agenda.

 

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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