OCC Guidance on Transition Periods under Section 716 of the Dodd-Frank Act
On January 3, the OCC issued guidance regarding requests for a transition period pursuant to Section 716(f) of the Dodd-Frank Act. A federal depository institution that is or may become a swap dealer may submit a request for a transition period, provided that such request conforms to the procedures and conditions established in the guidance. Written requests for transition periods must be submitted by January 31. OCC Release. OCC Guidance.
CFTC Reporting of Swap Transactions and Swap Dealer Registration
On January 2, the CFTC announced that real-time public reporting of swap transactions and swap dealer registration began on December 31, 2012. A list of provisionally registered swap dealers is contained in the CFTC release. CFTC Release.
Department of Labor Proposed Amendment to Underwriter Exemption
On December 28, 2012, the Department of Labor published a proposed amendment to the definition of the term “Rating Agency” under Section III.X of the individual Prohibited Transaction Exemptions (otherwise known as the Underwriter Exemptions). The proposed amendment would eliminate any specific reference to a particular credit rating agency, and substitute a requirement that a credit rating agency: (i) be currently recognized by the SEC as an NRSRO; (ii) have indicated on its most recently filed SEC Form NRSRO that it rates ‘‘issuers of asset-backed securities’’; and (iii) have had at least 3 ‘‘qualified ratings engagements’’ within a period not exceeding 12 months prior to the closing of the current transaction. Comments on the proposed amendment must be submitted by February 11. DOL Notice of Proposed Amendment.
SEC Rule for Lost Holders of Securities
On December 21, 2012, the SEC approved new rules requiring broker-dealers to conduct searches for holders of securities with whom they have lost contact. The rules also require broker-dealers and other market participants to provide notifications to persons who have not processed checks that they have received in connection with their securities holdings. The rules will be effective 60 days after publication in the Federal Register. SEC Release.
CFTC Exemptive Order on Cross-Border Application of Swap Provisions of Dodd-Frank
On December 21, 2012, the CFTC approved an exemptive order which provides relief from certain cross-border applications of the swaps provisions of the Dodd-Frank Act and the related regulations. The exemptive order expires on July 12. CFTC Release.
SEC Temporary Rule on Principal Trades with Advisory Clients
On December 20, 2012, the SEC amended Temporary Rule 206(3)-3T under the Investment Advisers Act of 1940 that establishes an alternative means for investment advisers who are registered as broker-dealers to meet the requirements of Section 206(3) of the Investment Advisers Act when they act in a principal capacity in transactions with certain advisory clients. The amendment extends the sunset date for the rule from December 31, 2012 to December 31, 2014. SEC Rule.
Joint Annual CRA Asset-Size Threshold Adjustment
On December 19, 2012, the Fed, FDIC and OCC released the annual adjustment to asset-size thresholds used to define small bank, small savings association, intermediate small bank and intermediate small savings association under the CRA. The asset-size threshold adjustment was effective January 1. Joint Press Release. Joint Technical Amendment.
CFTC Interim Final Rules on Business Conduct and Documentation Requirements
On December 18, 2012, the CFTC approved interim final rules for swap dealers and major swap participants which defer compliance with certain business conduct and documentation requirements until either May 1 or July 1, depending on the regulation. Comments must be submitted within 30 days after publication in the Federal Register. CFTC Release.
SEC Report on Assigned Credit Ratings
On December 18, 2012, the SEC released a Report to Congress on Assigned Credit Ratings, as required by Section 939F of the Dodd-Frank Act, to analyze the feasibility of establishing an assignment system for NRSROs to rate structured finance products, as proposed in the so-called “Franken Amendment.” The report describes the costs, benefits, and considerations of three courses of action: (i) establishing an assignment system; (ii) modifying the program established under Rule 17g-5 under the Exchange Act; and (iii) employing alternative compensation methods to incentivize accurate credit ratings. The report recommends that as a next step, the SEC convene a roundtable at which proponents and critics of the three courses of action can discuss the study and its findings. Report.
Fed Summarizes Changes to Consolidated Supervision of Large Financial Institutions
On December 17, 2012, the Fed summarized changes made in recent years to its program for consolidated supervision of large financial institutions. Fed Release.
CFTC Final Rule on Incorporation of Swaps into Records of Transactions
On December 17, 2012, the CFTC approved a final rule to conform CFTC regulations 1.35(a) and 1.31 to recordkeeping requirements for swap dealers and major swap participants under the Dodd-Frank Act. CFTC Release.
Fed Proposed Rules on U.S. Operations of Foreign Banks
On December 14, 2012, the Fed proposed rules on the oversight of U.S. operations of foreign banks. The proposed rules would require foreign banking organizations with a significant U.S. presence to create an intermediate holding company over their U.S. subsidiaries, which would help facilitate consistent and enhanced supervision and regulation of the U.S. operations of these foreign banks. Foreign banks would also be required to maintain stronger capital and liquidity positions in the U.S. Fed Release.
CFTC No-Action Letters
From December 14 through December 31, 2012, the CFTC released the following no-action letters:
On January 4, S&P updated its outlook assumptions for the U.S. residential mortgage market. S&P Report.
On December 28, 2012, Fitch updated its equipment lease and loan rating criteria. Fitch Report.
On December 24, 2012, DBRS released methodology for rating income funds. DBRS Report.
On December 21, 2012, Moody’s updated its methodology for power generation projects. Moody’s Report.
On December 20, 2012, Fitch updated its U.S. utility tariff bond rating criteria. Fitch Report.
On December 19, 2012, Fitch updated its criteria for pooled multifamily housing bonds. Fitch Report.
On December 18, 2012, Fitch updated its U.S. public power rating criteria. Fitch Report.
On December 17, 2012, Fitch updated its criteria for investment managers and alternative funds. Fitch Report.
Note: Free Registration is required for rating agency releases and reports.
Second Circuit Affirms Dismissal of Class Action Against S&P Over MBS Ratings
On December 20, 2012, the Second Circuit affirmed a decision by Judge Sidney H. Stein of the Southern District of New York dismissing a putative class action suit alleging that Standard & Poor’s Ratings Services intentionally misled investors about the accuracy of its credit ratings for mortgage-backed securities. The plaintiff pension fund, acting as a putative class representative of similarly situated shareholders, asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 15 of the Securities Act of 1933 against S&P’s parent company, McGraw-Hill Cos. Inc., and two of its corporate officers. The complaint alleges that defendants made false and misleading statements about the operations of S&P by concealing flaws in its rating methods. Judge Stein ruled that plaintiff failed to prove the defendants made false statements in financial earnings or acted with knowledge of wrongdoing. In particular, he found that statements promoting S&P’s independent and objective ratings were “mere commercial puffery” and could not form the basis of a securities fraud claim. A Second Circuit panel issued a summary order affirming the decision, finding that the factual allegations did not give rise to a strong inference that McGraw-Hill executives misled investors about S&P’s services in order to artificially inflate McGraw-Hill’s stock price. Order.
German Bank Brings $546 Million RMBS Action Against Bank of America
On December 14, 2012, DZ Bank, a German lender based in Frankfurt, filed a summons with notice against Bank of America Corp. in New York Supreme Court related to DZ Bank’s alleged purchase of over $546 million in RMBS. DZ Bank alleges that the offering documents for the securities contained material misrepresentations and omissions regarding the underwriting standards for the mortgage loans underlying the securities, the transfer of those loans to the issuing trusts, the validity of the trusts, and the statistical characteristics of the mortgage loans, including loan-to-value ratios and the percentage of owner-occupied properties. DZ Bank asserts causes of action for common-law fraud, fraudulent inducement, negligent misrepresentation, aiding and abetting fraud, declaratory judgment, rescission, restitution, and mutual mistake. Summons.
National Credit Union Administration Sues Bear Stearns for $3.6 Billion in RMBS
On December 17, 2012, the National Credit Union Administration Board, acting in its capacity as liquidating agent for four failed credit unions, sued several Bear Stearns affiliates in federal court in Kansas in connection with $3.6 billion in RMBS allegedly purchased by the failed credit unions. The NCUA alleges that the originators of the mortgage loans underlying the RMBS systematically disregarded the underwriting guidelines stated in the offering documents. It also alleges that the offering documents contain untrue statements of material fact concerning the evaluation of the borrowers’ capacity and likelihood to repay the mortgage loans, reduced documentation programs, loan-to-value ratios, and credit enhancement. The NCUA asserts 24 separate counts for relief under Sections 11 and 12(a)(2) of the Securities Act of 1933, the California Corporate Securities Law, the Kansas Uniform Securities Act, the Texas Securities Act, and the Illinois Securities Act. Complaint.
Washington Mutual Settles RMBS Suit Brought by Union Central Life Insurance Co.
On December 17, 2012, two Washington Mutual affiliates settled a lawsuit brought against them by Union Central Life Insurance Co. concerning $4.3 million in Washington Mutual-sponsored RMBS purchased by Union Central. In its amended complaint, Union Central alleged that Washington Mutual knowingly made false and misleading statements in the RMBS offering materials concerning the loans underlying the certificate, Washington Mutual’s compliance with its underwriting standards, and the accuracy of credit ratings assigned to the offered certificate. Union Central asserted three causes of action against the Washington Mutual affiliates for common law fraud, unjust enrichment, and aiding and abetting. Amended Complaint. Judge George B. Daniels of the Southern District of New York so ordered Union Central’s notice of dismissal of the action with prejudice as to the two Washington Mutual defendants. No terms of the settlement were provided. Earlier this year in the same action, Union Central settled its claims against Wells Fargo. The action continues against other defendants. Order.
Trustee Brings Putback Action Against Merrill Lynch
On December 18, 2012, U.S. Bank, acting in its capacity as Trustee for two Merrill Lynch RMBS trusts that issued over $1 billion in RMBS certificates, filed a complaint in New York Supreme Court against Merrill Lynch. The Trustee alleges that Merrill Lynch breached representations and warranties concerning the borrowers’ income and employment, the borrowers’ debts and debt-to-income ratio at the time the mortgages were originated, property value and loan-to-value ratios, and the owner-occupancy rates of the underlying properties. The Trustee asserts seven causes of action for breach of contract, anticipatory breach, and declaratory judgment, and seeks to require Merrill Lynch to repurchase the loans. Complaint.
New York Federal Court Denies BofA’s Motion for Reconsideration in FHFA Case
On December 18, 2012, Judge Denise Cote of the United States District Court for the Southern District of New York denied Bank of America’s motion for reconsideration of the denial of its motion to dismiss claims brought by FHFA. Bank of America argued that FHFA could not bring claims under Sections 11 and 12(a)(2) with respect to ten certificates issued before a final prospectus was filed. The court held that under Section 11, FHFA may assert claims based on commitments to purchase that were made before the filing of a final prospectus. Judge Cote further held that Bank of America’s arguments under Section 12(a)(2) and Rule 159 involve factual issues that cannot be resolved at the motion to dismiss stage. Decision.
Ally Financial’s Motions to Dismiss FHFA Claims Granted in Part
On December 19, 2012, Judge Denise Cote of the federal district court for the Southern District of New York decided motions to dismiss FHFA’s action against Ally Financial and underwriters of Residential Capital securities. The court dismissed claims of owner-occupancy and LTV-ratio fraud, Virginia Securities Act claims for certificates purchased before September 6, 2006, and Virginia Securities Act and Section 12(a)(2) claims with respect to certificates purchased from parties other than defendants. The court denied the remaining aspects of the motions to dismiss, including defendants’ requests that the court strike the demand for punitive damages, that the claims against Ally Financial Inc. be dismissed based on lack of control of the alleged primary violators, and for dismissal of the allegations against underwriter defendants that are not based on owner-occupancy and LTV fraud. Decision.
RBS Wins Dismissal of South Korean Bank Case
On December 27, 2012, Judge Harold Baer, Jr. of the United States District Court for the Southern District of New York dismissed an action brought by Woori Bank against RBS Securities and related entities claiming fraud, negligent misrepresentation, and unjust enrichment. Woori alleged that defendants knowingly marketed CDOs based on RMBS that had a greater risk than their ratings suggested, and that RBS fraudulently and negligently induced Woori to buy those CDOs. Further, Woori alleged that RBS concealed or failed to properly disclose their efforts to manipulate LIBOR rates. The court dismissed the fraud claim because Woori’s allegations did not specifically connect RBS’s alleged knowledge of problems or suspect behavior to the transactions at issue. Further, the court found that Woori was unable to show with sufficient specificity any facts that demonstrated RBS had created an inherently unfair transaction by failing to disclose information and accordingly dismissed the negligent misrepresentation claim. Decision.
Basel Committee on Banking Supervision FAQs on Basel III Counterparty Credit Risk and Exposures to Central Counterparties
On December 28, 2012, the Basel Committee on Banking Supervision published an updated version of its frequently asked questions on the Basel III rules relating to counterparty credit risk and exposures to central counterparties. The update includes new questions and answers on the rules text of Basel III relating to:
Advanced credit valuation adjustment capital charge;
Eligible hedges; and
Treatment of incurred credit valuation adjustment.
In addition, a new section of questions and answers has been added to assist with the interpretation of the rules text on the capitalisation framework for bank exposures to CCPs.
High Court Case on Mis-selling of Interest Rate Swaps
On December 21, 2012, the High Court decided an alleged mis-selling of interest rate swaps case in favour of the defendant, RBS. The claimants alleged that the interest rate swap sold to them by RBS in May 2005 as a form of insurance against their existing liabilities of £1.5 million had been mis-sold, on account of the fact that they “fared very badly under the swap” after interest rates fell from October 2008. The claimants argued that RBS was in breach of its common law duty of care and that, had it not been for these breaches of duty, they would never had entered into the swap.
In his judgment Judge Wakeman QC found that “Because of the credit crunch, the ensuing parlous position of RBS, and the taking of the wholly unforeseeable step of increasing margin significantly, it transpired that the protection given by the swap was not complete?.?.?.?But none of that means that the swap was an unsuitable product back in May 2005.” However he added that “this is a highly fact-sensitive case” that turned on what was said in meetings between the claimants and the defendant prior to the claimants entering into the swap.
UBS Fined £160 Million for Significant Failings in Relation to LIBOR and EURIBOR
On December 19, 2012, the FSA announced that it had fined UBS £160 million for misconduct relating to LIBOR and EURIBOR. The FSA’s final notice found that the misconduct was extensive and widespread, occurred in various locations around the world including Japan, Switzerland, the UK and the USA and, between 1 January 2005 and 31 December 2010, included:
The adjustment of UBS LIBOR and EURIBOR submissions to benefit UBS traders’ trading positions;
Colluding with interdealer brokers to manipulate the Japanese Yen LIBOR submissions of panel banks to the benefit of UBS traders; and
Adopting LIBOR submissions directives whose primary purpose was to protect UBS’s reputation.
EC Technical Standards for European Markets Infrastructure Regulation
On December 19, 2012, the European Commission adopted nine regulatory and implementing technical standards to complement obligations defined under the European Markets Infrastructure Regulation on OTC derivatives, central counterparties and trade repositories. The adoption of the technical standards finalizes requirements for the mandatory clearing and reporting of OTC derivatives transactions. The technical standards will be effective 20 days after publication in the EU Official Journal. EC Release.