Orrick's Financial Industry Week in Review - April 8, 2013

Financial Industry Developments

CFTC No-Action Relief for Commodity Pools

On April 2, the CFTC issued a time limited no-action letter that extended the deadline for compliance with reporting for commodity pool operators of securitization vehicles from March 31 until June 30.  CFTC No Action Letter.   

Fed Final Rule on Financial Supervision

On April 3, the Fed approved a final rule establishing the requirements to determine when a nonbank financial company is 'predominantly engaged in financial activities' in order for the Financial Stability Oversight Council (FSOC) to determine whether the company should be supervised by the Fed.  The final rule will become effective on May 6.  Fed Release.  Fed Final Rule.

Rating Agency Developments

On April 4, Moody's released its methodology for rating short-term cash flow notes.  Moody's Report.

On April 3, Fitch released its criteria for rating EMEA CMBS.  Fitch Report.

On April 1, Fitch released its criteria for rating FFELP student loan ABS.  Fitch Report.

On April 1, KBRA released its methodology for rating finance companies.  KBRA Report.

On April 1, S&P issued a request for comment on its proposed methodology for rating U.S. municipal affordable multifamily housing bond transactions.  Comments must be submitted by June 1.  S&P Release.

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

Asset Management

SEC No-Action Relief Under the JOBS Act

On March 26, the Staff of the Division of Trading and Markets of the SEC provided no-action letter relief from the broker-dealer registration requirements of the Securities Exchange Act of 1934 to FundersClub Inc. and its wholly-owned subsidiary in connection with their internet based, Rule 506 compliant securities offerings.  FundersClub and its subsidiary are venture capital fund advisers under Rule 203(l)-(1) of the Investment Advisers Act of 1940.  The FundersClub no action relief sets forth the Staff's interpretation of Section 201 of the JOBS Act, which provides an exemption from broker-dealer registration for persons providing certain services in connection with an offering under Rule 506 of Regulation D.  In granting the requested relief, subject to numerous conditions, the Staff noted that FundersClub and its subsidiary comply with the JOBS Act, in part, because they and each person associated with them receive no compensation (or the promise of future compensation) in connection with the purchase or sale of securities (transaction-based compensation), rather they receive compensation for their traditional advisory and consulting services, i.e., carried interest.  SEC No Action Letter.

Recent Orrick Alerts

London Stock Exchange High Growth Segment - An Interesting Halfway House but Will It Work?

This alert provides an overview of the High Growth Segment of the London Stock Exchange's (the Exchange) Main Market, key eligibility requirements for admission and key continuing obligations.  For more information, please click here.

RMBS Litigation

District Court Dismisses with Prejudice Loreley CDO Lawsuit

On March 28, Judge Richard Sullivan of the United States District Court for the Southern District of New York dismissed with prejudice a suit by five Loreley Financing entities against several banks and collateral managers stemming from Loreley's investments in three CDOs that defaulted.  The defendants included Wells Fargo Bank, Harding Advisory, Structured Asset Investors and the three CDOs.  The court dismissed each of Loreley's claims in their entirety.  It concluded that Loreley failed to allege adequately that an outside investor had interfered with the collateral managers' asset selection.  The court also rejected Loreley's allegations of material omissions in the offering documents, concluding that the information in question had been adequately disclosed to investors.  It further held that Loreley failed to plead facts giving rise to a strong inference that the defendants knew certain assets had decreased in value prior to purchasing them for one of the CDOs.  The court dismissed the remaining claims for the same reasons it dismissed the fraud claim.  Orrick represents Harding Advisory in this matter.  Order.

District Court Grants J.P. Morgan's Motion for Summary Judgment Against Dexia in RMBS Suit

On April 2, Judge Jed Rakoff of the United States District Court for the Southern District of New York largely granted J.P. Morgan's motion for summary judgment in RMBS litigation brought against it by Dexia, a Belgian bank, and FSA Asset Management.  In a two-page order, the district court dismissed with prejudice all of Dexia's claims against the defendants, but permitted FSA's claims as to five RMBS certificates to proceed.  The court indicated that it would issue a written opinion explaining the reasons for these rulings in due course.  Order.

New York Appellate Court Rejects MBIA's Pursuit of Rescissory Damages

On April 2, New York's First Department appellate court ruled that MBIA Insurance Corporation may not obtain rescissory damages in its breach of contract action against Countrywide because MBIA had freely given up its right to seek rescission in the contracts under which it sued.  The court also ruled that if MBIA were to prevail on its claims for breach, Countrywide could be compelled to repurchase breaching loans even if those loans are not yet in default.  The court concluded that the language in the agreements at issue permitted repurchase if MBIA's interests were "materially and adversely" affected and that such an effect could arise even if the loans had not defaulted.  Order.

Bank of America Reaches Pre-Litigation Settlement with NCUA for RMBS Losses

On April 2, the National Credit Union Administration (NCUA), an independent federal agency that supervises and charters federal credit unions, reached a $165 million settlement with Bank of America, stemming from BofA's sale of RMBS to failed credit unions.  Bank of America did not admit any fault in the agreement.  NCUA previously reached similar settlements with Citigroup, Deutsche Bank and HSBC.  NCUA did not file a lawsuit against Bank of America, although litigation is pending between NCUA and several other financial institutions.  Press Release.

European Financial Industry Developments

Bundesbank Opens Deutsche Bank Investigation

The German central bank, the Bundesbank, has launched an investigation into Deutsche Bank following claims that it lost billions on credit derivatives during the financial crisis.  Investigators from the Bundesbank are scheduled to fly to New York next week as part of an inquiry into allegations that misvaluing credit derivatives allowed Deutsche to hide up to $12 billion in losses, which helped it avoid a government bailout.  The investigators will interview people, including former employees, who have knowledge of Deutsche's credit derivatives dealings between 2006 and 2009.  It is alleged that had the proper valuations been made on the positions during the relevant period, the losses for the whole portfolio would have exceeded $4 billion and could have risen to $12 billion.

Deutsche Bank has denied the allegations and stated that the allegations were "more than two and a half years old," and had been the subject of a thorough investigation, which found them "wholly unfounded."

UK Financial Services Regulatory Handover

On April 1, the long-awaited handover of power from the FSA to the "twin-peaks system," consisting of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), took place.  The PRA, a branch of the Bank of England, will supervise 1,700 banks, insurers and large investment firms.  Its independent co-regulator, the FCA, will supervise all other financial services firms as well as be the conduct regulator and listing authority.  The Financial Prudential Committee, whose members will include the heads of the FCA and PRA as well as the Governor of the Bank of England, has also been formed.  It will have the task of monitoring the health of the financial system as a whole and has powers to force the other regulators to implement policies.