Orrick's Financial Industry Week in Review


Financial Industry Developments

FHA Takes New Steps to Provide Access to Credit for Underserved Borrowers

On May 13, FHA issued a paper outlining additional steps the agency is taking to expand access to credit for underserved borrowersReleasePaper

CFTC Announces New Approach for Considering Requests for Relief from Registration for Delegating Commodity Pool Operators

On May 12, CFTC Division of Swap Dealer and Intermediary Oversight announced a streamlined approach for considering requests for registration no-action relief from commodity pool operators who delegate certain activities to a registered commodity pool operator.  Applicants will need to represent that they meet certain specified criteria to benefit from the streamlined process.  Press ReleaseStaff Letter.      

FinCEN Issues Five Advisory Rulings Concerning Bank Secrecy Act's "Money Transmitter" Definition

On April 29, FinCEN Issued five advisory rulings concerning the application of the Bank Secrecy Act's Definition of "Money Transmitter" to various business models:

(i) whether a company that provides an armored car coin and currency exchange service is a Money Transmitter and whether the armored car service exemption would apply to the service;

(ii) application of money services business regulations to the rental of computer systems for mining virtual currency;

(iii) whether a company that provides online real-time deposit, settlement, and payment services for banks, businesses and consumers is a Money Transmitter rather than a provider of prepaid access;

(iv) whether a company that offers secured transaction services to a buyer and seller in a given sale of goods or services is a Money Transmitter; and

(v) application of money services business regulations to a company that offers escrow services to a buyer and seller in a given internet sale of goods or services.  IIIIIIIV. V.

Rating Agency Developments

On May 15, Fitch released its criteria for rating Portuguese and Spanish Electricity Tariff Deficit Securitisations.  Fitch Report.

On May 14, Fitch released its approach for rating counterparty risk for structured finance and covered bondsFitch ReportDerivatives Addendum.

On May 13, Moody's released its methodology for rating U.S. housing finance agenciesMoody's Report

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

RMBS and Other Securities Litigation

New York Appellate Court Dismisses Unjust Enrichment Claims But Allows Fraud Claims To Proceed in CDO Suits Against Citigroup and Merrill Lynch

On May 8, the New York Appellate Division, First Department decided appeals in two cases brought by investor Loreley Financing against Citigroup and Merrill Lynch relating to collateralized debt obligations (CDOs).  The court dismissed Loreley Financing's unjust enrichment and rescission claims, but allowed fraud claims to proceed in both actions. 

In the first action, Loreley alleged that Citigroup committed fraud by selecting risky RMBS for the CDOs it sold and by engaging in a scheme with certain investors to short the collateral in those CDOs.  The trial court dismissed Loreley's rescission claim against Citigroup but upheld its claims for unjust enrichment and fraud.  On appeal, the First Department reversed the lower court's decision in part, dismissing the unjust enrichment claim because the CDO transactions were based on written agreements.  The court affirmed the dismissal of Loreley's claims for rescission because Loreley had not alleged the absence of a complete and adequate remedy at law.  The First Department allowed Loreley's fraud claims to proceed, finding its fraud allegations were sufficiently detailed and that Citigroup's disclaimers in the offering documents about market risks and its involvement in the transaction were not specific enough to preclude Loreley from alleging reasonable reliance on Citigroup's representations.  Citigroup Decision

In the second action, Loreley alleged that Merrill Lynch failed to disclose that it had permitted a hedge fund to select collateral for the CDO and the hedge fund bet against the deal.  The First Department rejected Merrill Lynch's contention that the complaint was untimely, holding that factual disputes precluded resolution of whether the law of Jersey (in the Channel Islands) or the state of New York applied to Loreley's claims.  As in the Citigroup action, the First Department held that the unjust enrichment cause of action should have been dismissed because the transaction at issue was governed by written agreements.  The court also held Loreley had sufficiently pleaded fraud and alleged reasonable reliance, and fraud claims could proceed based on allegations that certain Merrill Lynch entities played a significant role in structuring the CDO and selling it to investors.  Merrill Lynch Decision.    

European Financial Industry Developments

EU Banking Union Regulations Published in Official Journal

ECB Regulations 468/2014 and 469/2014 – which relate to the framework for the EU Single Supervisory Mechanism (SSM) – were published in the EU's Official Journal on May 14, prior to the formal commencement of the ECB's SSM role on November 4, 2014.

Both regulations supplement the main SSM Regulation (1093/2013), which forms the core of the EU's well publicized move towards a banking union.  Under the terms of that regulation, the ECB is to be granted broad powers of supervision over "credit institutions" (e.g. banks) established in participating eurozone member states and other member states that wish to opt-in (significantly, the UK government has indicated that it does not wish to participate). In practice, this means that the ECB will be the ultimate regulator for eurozone banks, with responsibilities including:

    • licensing and authorising credit institutions;
    • passporting applications;
    • the imposition of prudential and governance requirements; and
    • supervision of recovery plans.  Regulation 468/2014Regulation 469/2014

Council of EU Adopts MiFID 2

On May 13, the Council of the EU announced that it had adopted the Markets in Financial Instruments Regulation (9343/14) and Markets in Financial Instruments Directive (9344/14) (together known as MiFID 2), thereby setting the course for their publication in the Official Journal later this year and effectiveness in 2016.

MiFID 2 broadens the scope of MiFID 1 which came into force in 2007 and provided a harmonized regulation for investment services across the member states. Much of the coverage on MiFID 2 has focused on expected curbs to high-frequency trading and "dark-pools" in equity trading, but while these activities may be affected, MiFID 2 is much more far-reaching.  The new regulation, for which over 2000 amendments have been submitted since publication of the first draft in 2011, will dramatically alter the way in which most shares, bonds, derivatives and commodities are traded, cleared and reported in member states, with the overriding objective of increasing market efficiency, openness and transparency while reducing systemic risk and market disorder.  Council of Europe Press Release


Orrick's Annual Financial Services Roundtable, June 11

Members of Orrick's Employment Law & Litigation Group invite you to join an interactive discussion of critical employment law issues impacting the financial services industry. Roundtable discussion topics include wage-and-hour cases impacting the financial services industry, employee background checks, update on EEOC and OFCCP enforcement initiatives for 2014 and the latest whistleblower law developments under federal and new California state law.  For more information and to register for this event, please click here.  


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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