Orrick's Financial Industry Week In Review - June 4, 2012


Financial Industry Developments


Fed Rule on Supervised Securities Holding Company Registration

On May 29, the Fed approved a final rule to implement Section 618 of the Dodd-Frank Act, outlining the procedures for securities holding companies (nonbank companies that own at least one registered broker or dealer) to elect to be supervised by the Fed.  Release.  Final Rule.

MSRB Request for Comment on Trade Size Reporting System

On June 1 the MSRB published a request for comment on a proposal to provide for more rapid public dissemination of trade size information for large municipal securities transactions through the MSRB Real-Time Transaction Reporting System.  Comments must be submitted by July 2.  MSRB Request for Comment.

MSRB Concept Release on Disclosure of Financial Incentives

On May 31, the MSRB published a concept release seeking comment on a proposal to require underwriters and municipal advisors to disclose whether they have made or received certain payments in connection with new issues of municipal securities.  Comments must be submitted by July 31.  MSRB Concept Release.  

IOSCO Consults on Rating Agency Internal Controls

On May 25, IOSCO published a consultation report describing internal controls and procedures that rating agencies use to promote the integrity of the rating process and address conflicts of interest.  IOSCO is seeking the views of stakeholders and rating agencies to assist it with further analysis of rating agency internal controls and procedures.  Comments must be submitted by July 9.  IOSCO Release.  IOSCO Report.

Rating Agency Developments


On June 1, Fitch published its updated global rating criteria for CLOs backed by loans to medium-sized enterprises.  Fitch Report.

On May 31, S&P updated its methodology and assumptions for assessing counterparty risk in covered bond programs.  S&P Report.

On May 30, Moody’s released its approach to rating Australian RMBS.  Moody’s Report.

On May 30, Fitch updated its structured finance counterparty criteria.  Fitch Release.

On May 30, Fitch updated is structured finance SPV criteria.  Fitch Report.

On May 29, DBRS released its methodology for U.S. structured finance transactions backed by direct pay letters of creditDBRS Report.

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

Recent Orrick Alerts


Restructuring Alert: Supreme Court Confirms that Secured Creditors Have a Presumptive Right to “Credit Bid” in a Sale of Their Collateral Conducted Pursuant to a Chapter 11 Bankruptcy

On May 29, 2012, the United States Supreme Court issued its much-anticipated decision in the Chapter 11 bankruptcy cases for RadLAX Gateway Hotel, LLC and its affiliate.  The Court held that when a debtor proposes to sell a secured creditor’s collateral free and clear of the creditor’s lien pursuant to a Chapter 11 bankruptcy plan, the debtor cannot deny the creditor the opportunity to “credit bid” in the sale without cause.  This decision resolves what was described to the Court as “[p]erhaps the most hotly debated issue of bankruptcy law today” and is a significant victory for issuers of secured credit.   For more information on this case and its potential impact, read the related Orrick Client Alert here.  

RMBS Litigation


RMBS Trust Files $293 Million Suit Against EMC Mortgage and JPMC

On May 25, 2012, the securitization trust of two RMBS sold in 2006 by EMC Mortgage LLC filed a summons with notice in New York State Supreme Court.  The action seeks specific performance, compensatory damages in the amount of at least $293 million, and declaratory judgment against EMC and its successor in interest JP Morgan Chase & Co.  The summons and notice alleges that EMC failed to cure breaches of representations and warranties it made relating to the quality of the pool of residential mortgage loans.  The trust alleges breaches with respect to at least 1,917 of the loans and requests repurchase of those loans.  Summons with Notice. 

ResCap Seeks Automatic Bankruptcy Stay of 27 MBS Suits

On May 25, 2012, Residential Capital LLC (“ResCap”) filed a complaint in United States Bankruptcy Court for the Southern District of New York seeking declaratory and injunctive relief to extend the automatic stay over 27 MBS lawsuits against it, its affiliates, and its executives while it undergoes bankruptcy restructuring.  ResCap alleges that all of the lawsuits against its non-debtor affiliates are inextricably connected to the debtor affiliates, and that such lawsuits will drain the debtors’ estates by forcing those entities to undergo extensive discovery and face significant indemnification claims by their directors and officers.  ResCap also alleges that by allowing the lawsuits to proceed, ResCap will face significant risk of collateral estoppels and evidentiary prejudice. Complaint.

European Financial Industry Developments


Blue Index Trio Plead Guilty to Insider Dealing

On 28 May 2012, the FSA announced that three defendants with links to Blue Index Ltd, a contract for difference brokerage, pleaded guilty to charges of insider dealing.  These are James Sanders, a director of Blue Index, Miranda Sanders, his wife, and James Swallow, another director of Blue Index.  Two further defendants were acquitted.

The prosecution alleged that inside information was leaked by Arnold McClellan, a senior partner in Deloitte Tax LLP, who was an insider to a number of mergers and acquisitions in US securities listed on the NYSE and NASDAQ exchanges, or by his wife, Annabel McClellan, who is the sister of Miranda Sanders.  The information was used by James and Miranda Sanders to commit insider dealing.  James Sanders disclosed the information to other people including James Swallow, who also used the information to commit insider dealing.  The three defendants will be sentenced on 19 June 2012. FSA Announcement.   

FSA Levies Record Fine of £3 Million on Hedge Fund Manager Micalizzi

On 29 May 2012, the FSA published a decision notice indicating that it had decided to fine Alberto Micalizzi, CEO of Dynamic Decisions Capital Management Ltd (DDCM), a hedge fund management company based in London, £3 million and ban him from performing any role in regulated financial services for not being fit and proper. The FSA also decided to cancel the permission of DDCM to conduct regulated business. 

Between 1 October 2008 and 31 December 2008, the master fund (the Fund) managed by DDCM suffered catastrophic losses of over USD390 million, approximately 85% of its value. In the FSA’s opinion, in late 2008, to conceal the losses, Mr. Micalizzi lied to investors about the true position of the Fund and entered into a number of contracts, on behalf of the Fund, for the purchase and resale of a bond (the Bond contracts). The FSA believes that the bond was not a genuine financial instrument and that Mr. Micalizzi was aware of this when he entered into the Bond contracts.  This is the biggest ever penalty for an individual in the case of non market abuse imposed by the FSA. Decision Notice for Mr. Micalizzi. Decision Notice for DDCM

FSA Fines IFA for Advising Clients to Invest in Unsuitable Products

On 30 May 2012, the FSA announced that it had fined independent financial adviser (IFA) Patrick Francis O'Donnell of P3 Wealth Management Limited, £60,000 for advising his clients to invest in unsuitable non-mainstream investments and Unregulated Collective Investment Schemes (UCIS).  Non-mainstream investments include, amongst other things, traded life policy investments and unlisted shares.  Mr. O'Donnell has also been banned from performing any function in relation to any regulated activity in the financial services industry.

The FSA found that around two thirds of Mr. O'Donnell's clients invested over 75% of their available funds into UCIS and other non-mainstream investments.  Many of his customers received advice that was unsuitable for them.  UCIS cannot be promoted to the general public in the UK, and should be marketed to limited people such as sophisticated investors and high net worth individuals.  The FSA has previously taken action against a number of firms and individuals in relation to UCIS, including Rockingham Independent Limited, Moneywise IFA Limited and Specialist Solutions Plc.  Final Notice for Mr. O'Donnell.  

EU Commission to Publish Proposals for a European Bank Recovery and Resolution Framework on 6 June 2012

The European Commission has published an agenda which, inter alia, states that it will present its legislative initiative for a new European framework for bank recovery and resolution on 6 June 2012.  Agenda.

According to the agenda, key elements of the proposal are:

  • The framework will primarily be based on preventing and reducing the risk of failure. The powers of the European supervisory authorities (ESAs) will be expanded so that they can intervene at an early stage before problems in a bank become critical and its financial situation deteriorates irreparably.
  • The proposal will ensure that national authorities and the European Banking Authority (EBA) have the appropriate co-ordination tools to ensure coherent procedures. This is particularly important in the context of cross-border banking groups.
  • The framework will provide for credible resolution tools when a bank is no longer viable and allowing it to go bankrupt would be disruptive for essential financial services and overall stability. These tools will include bail-in measures (the power to convert or write down the debt of failing banks).
  • To be effective, sufficient funds should be available to finance resolution, for example to issue guarantees or provide short term loans to help a newly set up bridge bank to operate. Such funds would only serve to ensure the continuity of critical functions and not to bail out troubled institutions.  

FSA Publishes Consolidated Policy Statement Setting Out the Regulatory Fees and Levies for 2012/13

On 29 May 2012, the FSA published its consolidated policy statement, which provides an overview of the FSA's fee-raising arrangements and sets out the regulatory fees and levies for 2012/13.  Consolidated Policy Statement: PS12/11.  Consultation Paper: CP12/3.

Highlights include:

  • The FSA's annual funding requirement (AFR) of £559.8 million is 3.2% lower than the estimate consulted on in CP12/3.
  • The final Solvency II special project fee (SPF) rates recovery for 2012/13 is £15 million, compared with the £25.9 million estimated in CP12/3.
  • The minimum fee for authorised firms will remain at £1,000 for the third year running.



AD&Co’s 20th Annual Conference: Innovation Amid Uncertainty

Andrew Davidson & Co. will be hosting their 20th Annual Conference - Innovation Amid Uncertainty, on June 13 in the Graduate Center of City University of New York.  Partner Howard Altarescu will participate as a panelist in the session Securitization and Risk Sharing: Restoring the Role of Private Capital in the Housing Finance System. For more information about the event, and to register, please click here. 

Global ABS 2012 Conference

Orrick is an exhibitor sponsor of Global ABS 2012 Conference, which will be hosted by Information Management Network (IMN) at Square Brussels Meeting Center in Brussels, Belgium on June 12-14. More than 3,500 structured finance professionals are expected to attend. The agenda will include, among others, topics such as global regulatory changes that impact securitization; restoring confidence in the ABS markets; and CMBS, RMBS, and real estate and market fundamentals.  For more information, 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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