Orrick's Financial Industry Week in Review

by Orrick, Herrington & Sutcliffe LLP
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Financial Industry Developments

The Fed Invites Comment on Proposal to Modify the Regulations for Capital Planning and Stress Testing

On June 12, the Fed invited comments on a proposal to modify the regulations for capital planning and stress testing.  The proposed rule includes a number of measures that would alter the capital planning and stress test processes.  Comments on the proposed rule will be accepted until August 11, 2014.  Press ReleaseProposal.   

Sharon Bowen Sworn in as a Commissioner of the CFTC

On June 9, the CFTC officially swore in Sharon Bowen, to serve as a commissioner.  Ms. Bowen was born in Chesapeake, Virginia.  She received her B.A. in Economics from the University of Virginia, MBA from the Kellogg School of Management and J.D. from Northwestern University School of Law. She lives with her husband in New York City.  Press Release.   

Rating Agency Developments

On June 13, Moody's announced that its private student loan default rate index will continue to decline.   Moody's Report.

On June 13, Fitch announced that it has taken various conforming rating actions on enhanced municipal bonds and tender option bonds (TOBs).  Fitch Report

On June 12, Moody's released its approach for rating derivative product companiesMoody's Report.

On June 11, DBRS released its general corporate rating methodologyDBRS Report

On June 10, S&P released its request for comment on rating counterparty risk in terminating transactionsS&P Release.

On June 10, Fitch released its criteria for commercial mortgage-backed securities and loans in EMEAFitch Report.

On June 9, Fitch released its criteria for rating U.S. timeshare loan asset-backed securitiesFitch Report.

On June 9, Fitch released its criteria for rating future flow securitizationsFitch Report.

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

Distressed Debt and Restructuring Developments

Supreme Court Permits Bankruptcy Court to Hear Adversary Proceeding; Bypasses Issues Regarding Party Consent

On June 9, the Supreme Court held that a bankruptcy judge may submit proposed findings of fact and conclusions of law for review by a federal district court in otherwise "core" adversary proceedings where a non-debtor party has not consented to bankruptcy court jurisdiction.  While a federal district court does not need to conduct the initial hearing, the district court must review the matter de novo prior to entering a final judgment.  See Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency), ___ U.S. ___ (2014)

The Supreme Court, however, did not address whether a bankruptcy court may exercise the federal judicial power under Article III by entering a final judgment against a non-creditor based on its consent, and, if so, whether "implied consent" can also satisfy the requirements of Article III.  Many commentators anticipated that the Supreme Court would resolve this issue.  Instead, the Supreme Court found that it was unnecessary to address the consent issue because the district court's de novo review of the bankruptcy court's order cured any potential error in the bankruptcy court's judgment.  As a result, litigants will face continued uncertainty regarding their ability to waive their right to have a final judgment entered by an Article III court to avoid increased expense and delay.

Asset Management

SEC Issues Responses to Frequently Asked Questions on the Volcker Rule

On June 10, the staff of the Divisions of Trading and Markets, Investment Management and Corporation Finance provided guidance on the commission's final rule implementing Section 13 of the Bank Holding Company Act of 1956, commonly referred to as the "Volcker Rule," through the issuance of Responses to Frequently Asked Questions. FAQs.   

RMBS and Other Securities Litigation

UBS Motion to Dismiss RMBS Suit Granted in Part

On June 10, Judge Denise Cote of the U.S. District Court for the Southern District of New York granted in part and denied in part UBS's motion to dismiss a lawsuit filed against it by the National Credit Union Administration, as liquidating agent for Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union.  The credit unions each owned certain RMBS issued by UBS.  Following her ruling in an earlier case NCUA brought against Morgan Stanley, Judge Cote dismissed NCUA's federal Securities Act claims as time barred.  Judge Cote denied UBS's motion to dismiss NCUA's claims under Illinois and Texas Blue Sky Laws, holding that NCUA had satisfied the liberal pleading standard by making the requisite "originator-specific allegations" to support its claims that UBS made material misrepresentations regarding whether the originators had complied with underwriting guidelines.  Order.   

EMC Obtains Partial Dismissal of Repurchase Action

On May 29, Justice Eileen Bransten of the New York County Supreme Court denied in part and granted in part defendants' motion to dismiss a loan repurchase lawsuit brought at the direction of certain certificate holders of four RMBS.  The complaint alleged that EMC Mortgage breached certain representations and warranties concerning loans in the trusts and also sought to hold certain JPMorgan entities vicariously liable for EMC's alleged breaches.  Justice Bransten dismissed without prejudice the claims against the JPMorgan entities for failure to properly plead successor liability or parent liability.  As to EMC, the Court rejected EMC's argument that the claims were limited to certain loans identified in timely repurchase demands, holding that the content of the specific repurchase demands at issue sufficiently and timely notified EMC of its alleged obligation to repurchase all allegedly breaching loans in the trusts.  Justice Bransten also relied on Plaintiff's allegation that EMC discovered allegedly breaching loans during its pre-closing due diligence to hold that Plaintiff's claims as to all allegedly breaching loans in the transaction were timely.  Justice Bransten refused to dismiss plaintiff's unjust enrichment claims, which were based upon allegations that EMC withheld settlement funds received from loan originators that properly belonged to the Trust, holding that the PSA's sole remedy clause does not preclude these claims.  Finally, Justice Bransten dismissed claims for consequential and rescissory damages as barred by the sole remedy provision, and dismissed plaintiff's reimbursement claim because the PSA did not unmistakably provide for attorney's fees in first-party actions.  Order.  

European Financial Industry Developments

Eurozone Member States Reach Preliminary Agreement on ESM Direct Recapitalization Instrument

On June 10, a statement by the President of the Eurogroup was published announcing that the Eurozone has reached a political understanding on the operational framework of a direct recapitalization instrument (DRI) for the European stability mechanism (ESM).  The ESM has also published FAQs setting out the detail of the agreement.

Once operational, the DRI would be applicable to systemically relevant credit institutions (as defined in the SSM Regulation (Regulation 1024/2013)) and to financial holding companies and mixed financial holding companies (as defined in the Capital Requirements Regulation (Regulation 575/2013)).  The DRI could only be activated if an institution was unable to meet its capital requirements, was unable to obtain sufficient capital from private sources and the ESM member concerned was unable to provide financial assistance without damaging its own fiscal sustainability.  Statement.  FAQs

ESMA Chair Speech on Systemic Risks and Current Policies in EU Fund Industry

On June 10, the Chair of the European Securities Markets Authority (ESMA) gave a speech on systemic risks and current policies in the EU fund industry, which considers whether asset managers can be too big to fail.

Among other topics, the speech outlined ESMA's priorities on the Alternative Investment Fund Managers Directive (AIFMD), bearing in mind that the transitional period for full implementation comes to an end in July 2014. ESMA is looking to develop its existing Q&A document, and invites comments on any further topics stakeholders would like to see included in it.  Speech

Bank of England Launches New Framework to Test for Cyber Vulnerabilities

On June 10, the Bank of England launched a new framework to help identify areas where the financial sector could be vulnerable to sophisticated cyber-attack. The new framework is called CBEST and was launched in May 2014.

CBEST uses intelligence from Government and accredited commercial providers to identify potential attackers to a particular financial institution.  It then replicates the techniques these potential attackers use in order to test the extent to which they may be successful in penetrating the defenses of the institution.  Participation will be voluntary, although it is expected that take-up will be significant.  Press Release.  

 

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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