Orrick's Financial Industry Week in Review


Financial Industry Developments

Extension of Comment Period for Reg AB II

On March 28, the SEC extended the comment deadline for the re-opened comment period on two releases related to asset-backed securities with respect to the approach for dissemination of potentially sensitive asset-level data in disclosures that would be required under what is commonly referred to as Reg AB II.  The comment deadline was extended through April 28.  SEC Extension.

Rating Agency Developments

On April 3, S&P released an advance notice of a proposed criteria change for RMBS servicer advance receivable transactions.   S&P Report.

On March 28, Moody's released its methodology for rating U.S. tax lien-backed ABS.  Moody's Report.

On March 28, S&P released its methodology for rating U.S. small business loan-backed securitizations.  S&P Report.

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

Asset Management

SEC Staff Guidance on the Testimonial Rule and Social Media

The week of March 24, the Division of Investment Management of the SEC issued guidance to clarify the application of section 206(4) of the Investment Advisers Act of 1940 and rule 206(4)-1(a)(1) thereunder, which generally prohibits the use of "testimonials,"  as it relates to the dissemination of genuine third-party commentary.  In particular, the staff stated that, in certain circumstances, an investment adviser's or investment advisory representative's publication of all of the testimonials about the investment adviser or IAR from an independent social media site on the investment adviser's or IAR's own social media site or website would not implicate the concern underlying the testimonial rule.  Testimonial.

RMBS and Other Securities Litigation

Mortgage Putback Case Against JPMorgan Dismissed

On March 27, Judge Miriam Goldman Cedarbaum of the Southern District of New York granted JPMorgan Chase Bank's motion to dismiss a lawsuit brought by Wells Fargo Bank N.A. in its capacity as a CMBS trustee.  Judge Cederbaum held that Wells Fargo's claim that JPMorgan breached the representations and warranties in a mortgage loan purchase agreement was barred by New York's six-year statute of limitations.  In particular, Judge Cederbaum held that the statute of limitations began to run at the time the mortgage loan purchase agreement was executed in 2002, which was when the representations at issue were made and allegedly breached and when Wells Fargo first could have sought repurchase from JPMorgan.  Wells Fargo's complaint, filed in 2012, therefore was untimely.  Order.  

North Carolina Magistrate Recommends Dismissal of One of Two RMBS Cases Against Bank of America

Magistrate Judge David S. Cayer of the Western District of North Carolina issued two reports and recommendations in cases brought against Bank of America by the U.S. government arising out of RMBS sold by Bank of America.  In the first report and recommendation, issued in a case brought by the Department of Justice seeking civil penalties under FIRREA, Magistrate Judge Cayer recommended that Defendants' motion to dismiss be granted.  The government's claims arose out of two alleged predicate criminal offenses:  (1) false statements under 18 U.S.C. § 1001; and (2) fraud in loan and credit applications under 18 U.S.C. § 1014.  Magistrate Judge Cayer held that neither predicate act was adequately alleged.  As to the first, he held that § 1001 requires that a false statement have a tendency to cause a government agency to act, other than by bringing an enforcement action.  Statements in a prospectus supplement filed with the SEC do not qualify because they did not prompt any actions by the SEC other than enforcement.  Similarly, the presence of a Federal Home Loan Bank as a purchaser was insufficient because the bank itself was not a federal agency and there was nothing to suggest that the representations were material to the bank's regulating agency, the FHFB.  As to the second, he held that § 1014 applies only to statements made in connection with loan-making activities, not to statements made in connection with the purchase of securities. 

In the second report and recommendation, issued in a case brought by the SEC asserting claims under Sections 5 and 17 of the Securities Act, Magistrate Judge Cayer recommended that Defendants' motion to dismiss be denied.  The SEC's complaint alleged that Bank of America provided inaccurate information about the percentage of wholesale loans in the loan pool for a RMBS and made misrepresentations in the offering documents for that RMBS about the underwriting practices used in connection with the loans.  As to the Section 17 claim, Magistrate Judge Cayer held that the complaint sufficiently alleged negligent misstatements about the underwriting guidelines and practices applicable to the loans.  As to the Section 5 claim, he held that the claim could survive because information concerning the number of wholesale loans in the loan pool was communicated to certain investors without being filed with the SEC.  SEC Report and RecommendationDOJ Report and Recommendation.  

Court Denies WMC Motions to Dismiss Related Repurchase Actions

On March 31, Judge Charles S. Haight, Jr. of the District of Connecticut denied WMC Mortgage, LLC's motions to dismiss four related repurchase cases brought by RMBS trustees on behalf of the trusts.  Judge Haight rejected WMC's argument that the trusts' claims should be dismissed to the extent that they related to allegedly breaching loans that were not the subject of pre-suit repurchase demands.  Judge Haight also held that, while the sole remedies provisions of the pooling and servicing agreements preclude claims for general damages, the trustees may nonetheless obtain monetary relief if the specific performance contemplated by the sole remedies provisions is not available.  Order.   

European Financial Industry Developments

BCBS Issues Guidelines on External Audit of Banks

Following a period of consultation in 2013, the Basel Committee on Banking Supervision (BCBS) has issued guidelines on the external audit of banks, replacing previous BCBS audit guidelines issued in 2002 and 2008.  The new guidelines (known as BCBS280) offer:

  • guidance on the role and responsibilities of bank audit committees in relation to external audits and the engagement of supervisors with auditors and audit oversight authorities;
  • a framework for supervisors to assess the effectiveness of audit committees in their monitoring and assessment of external audits;
  • and expectations and recommendations for enhancing the quality of external audits.  The Guidelines

FCA Orders Review into UK Credit Card Market

The UK financial regulator, the Financial Conduct Authority (FCA), has announced that it intends to launch a probe into the UK's £150bn credit card market over concerns that the market is not working effectively for those consumers in difficult financial situations.  It is expected that the review, which will focus on the competitive aspects of the market, will also examine whether behavioural economic biases and consumer inertia allow credit card issuers to breach the duty of care they owe towards vulnerable consumers.

The move follows the FCA's launch in March of a review of payday lenders, which was also aimed at protection of consumers in financial difficulties.  FCA Press Release.   

ESMA Reports on Information that Competent Authorities Should Provide to it Under the AIFMD

The European Securities and Markets Authority (ESMA), has published a final report of technical advice for the European Commission setting out the information that "competent authorities" (i.e., the financial services regulator in each EU member state) should provide to it under the Alternative Investment Fund Managers Directive (AIFMD).  Under the current rules of the AIFMD, EU alternative investment fund managers benefit from the EU passport when managing and marketing EU alternative investment funds in the EU.  Non-EU alternative investment funds and managers, on the contrary, are subject to the national private placement regime of each of the Member States where they market or manage AIFs.  However, the AIFMD makes provision for the passport to be potentially extended in future.  The report is intended to advise the European Commission on the content of the legislation to be passed under Article 67(5) of the AIFMD to enable this extension of the AIFMD passport system.  Report.  


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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