Orrick's Financial Industry Week In Review - August 27, 2012


SEC Decides Not To Release Money Market Fund Reform Proposal

On August 22, the SEC announced that three of five Commissioners did not support a proposal to reform money market funds and the proposal will not move forward to publication for public comment.  The proposal was intended to address certain structural issues inherent to such funds and to disincentivize runs on the funds.  Statement of SEC Chairman.  Testimony of Witnesses.  

Fannie Mae and Freddie Mac Short Sale Guidelines

On August 21, the FHFA announced that Fannie Mae and Freddie Mac are issuing guidelines to mortgage servicers to consolidate existing short sales programs into one standard program.  The guidelines go into effect on November 1.  The guidelines: (i) offer a streamlined approach for borrowers most in need; (ii) enable servicers to quickly and easily qualify certain borrowers who are current on their mortgages for short sales; (iii) provide for Fannie Mae and Freddie Mac to waive the right to pursue deficiency judgments in exchange for a financial contribution when a borrower has sufficient income or assets to make cash contributions or sign promissory notes; (iv) offer special treatment for military personal with permanent change of station orders; (v) consolidate existing short sales programs into a single unified program; (vi) provide servicers and borrowers with clarity on processing a short sale when a foreclosure is pending; and (vii) provide that Fannie Mae and Freddie Mac will offer up to $6,000 to second lien holders to expedite a short sale.  FHFA Release.   

CFTC Proposed Order for Regional Transmission Organizations and Independent System Operators

On August 21, the CFTC approved a proposed order that would exempt certain transactions of Regional Transmission Organizations and Independent System Operators including the purchase or sale of financial transmission rights, energy transactions, forward capacity transactions, and reserve or regulation transactions from certain provisions of the Commodity Exchange Act and CFTC regulations.  Comments must be received within 30 days after publication in the Federal Register.  CFTC Release.

CFPB Proposed Rule for the Mortgage Market

On August 17, the CFPB proposed rules to bring greater accountability to the mortgage loan origination market.  The proposal would: (i) require lenders to make a no-point, no-fee loan option available; (ii) require an interest-rate reduction when consumers elect to pay upfront points or fees; (iii) set qualification and screening standards; (iv) prohibit payment of steering incentives to mortgage loan originators; and (v) place restrictions on arbitration clauses and financing of credit insurance.  Comments must be received by October 16.  Final rules will be issued in January 2013.  CFPB Release.   

Rating Agency Developments


On August 23, Moody’s identified key risk factors in securitizations of single-family rental properties, including: (i) the performance of a manager of the properties; (ii) the variability of cash flows from the rental and ultimate sale of the properties; and (iii) the lack of historical data on the single-family rental market.  Moody’s Release.  

On August 23, Moody’s released its reinvestment rate assumptions for U.S. state revolving fund and pool programs.  Moody’s Report.

On August 23, Moody’s released its interest rate assumptions for state HFA cash flows.  Moody’s Report.

On August 22, DBRS issued a request for comment on its U.S. collateralized fund obligations backed by private equity rating criteria. DBRS Request for Comment.

On August 21, Moody’s published a request for comment on proposed adjustments to its modeling assumptions to account for the impact of a rapid and significant country credit deterioration on structured finance transactions.  Comments may be submitted until October 30. Moody’s Release.  Moody’s Report.

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

Recent Orrick Alerts


SEC Pays First Ever Dodd-Frank Whistleblower Bounty Award

On August 21, the SEC announced that it awarded its first whistleblower bounty, just over one year after the SEC’s Dodd-Frank whistleblower rules became effective.  The SEC’s Claims Review Staff issued a short order, Release No. 34-67698, granting the whistleblower’s award, which notes that the SEC declined to award a claim to a second whistleblower involved in the action. This alert, written by Mike DelikatRenee Phillips and Rachel Coe, discusses what this means to companies, and what proactive steps should be considered. Click here to read more.

RMBS Litigation


Court Dismisses Occupancy Status Claims Against Countrywide

On August 17, Judge Mariana R. Pfaelzer of the United States District Court for the Central District of California granted in part and denied in part the motion of Countrywide and Bank of America to dismiss an action brought by MassMutual in connection with its alleged purchase of RMBS.  Judge Pfaelzer held that Countrywide could not be liable for accurately repeating borrower-provided occupancy information in its offering documents where the offering documents specifically attributed the statements about owner occupancy to the borrowers.  Judge Pfaelzer further held that MassMutual failed to sufficiently plead Bank of America’s liability as a successor to Countrywide, thus warranting dismissing Bank of America from the suit.  The court held, however, that MassMutual had sufficiently pled claims under the Massachusetts Uniform Securities Act for alleged misrepresentations as to loan-to-value ratios and originator compliance with underwriting guidelines.  Decision.

Court Certifies RMBS Investor Class in IndyMac RMBS Suit

On August 17, Judge Lewis A. Kaplan of the United States District Court for the Southern District of New York certified a class of investors in an action brought by lead plaintiffs Wyoming State Treasurer and Wyoming Retirement System against several financial institutions in connection with RMBS issued by IndyMac.  Judge Kaplan found that while the prospective class members’ claims differ in some respects, the central issue for all class members is whether IndyMac made material misrepresentations in its offering documents.  Judge Kaplan rejected the defendants’ argument that individual issues regarding investor knowledge, reliance, and notice warranted the denial of class certification.  However, the court dismissed claims in connection with one RMBS certificate because Wyoming Retirement System did not acquire the certificate in an initial offering.  The class claims are alleged to arise under Sections 11, 12(a)(2), and 15 of the Securities Act. Decision.

Court Limits Assured Guaranty’s Claims Against UBS

On August 15, Judge Harold Baer, Jr. of the federal district court for the Southern District of New York granted in part and denied in part UBS’s motion to dismiss claims asserted by Assured Guaranty Municipal Corporation in connection with three RMBS securitizations insured by Assured Guaranty.  Judge Baer held that Assured Guaranty did not have the contractual right to bring claims for breach of the relevant Pooling and Servicing Agreements’ repurchase remedies and that its claims for a declaration that UBS had failed to comply with its repurchase obligations should be dismissed as duplicative of its claim for breach of those obligations.  The court permitted Assured Guaranty to proceed, however, with other contract claims including its claim for breach of certain representations and warranties in the PSAs, concluding that the PSAs’ “no-action clauses” do not apply to Assured Guaranty as insurer and that a contractual “sole remedy” provision “may not apply to Assured,” a factual issue to be determined at a later stage of the case.  Decision.

FDIC Files Three RMBS Lawsuits as Receiver for a Texas Bank

On August 17, the FDIC, in its capacity as receiver for Texas-based Guaranty Bank, filed three actions in Texas state court arising out of the bank’s alleged investments in 36 RMBS certificates totaling $5.4 billion in face value.  In all three suits, the FDIC alleges that the defendant banks violated the Texas Securities Act and the Securities Act of 1933 by making material misrepresentations and omissions in offering documents.  The FDIC seeks a combined total of at least $2.1 billion, plus attorneys’ fees and costs.

Complaint: FDIC v Ally Securities, et al. 
Complaint: FDIC v Countrywide Securities Corp, et al. 
Complaint: FDIC v J.P. Morgan Securities, et al.

European Financial Industry Developments


Treasury Committee Publishes LIBOR Report

On August 18, the Treasury Select Committee (TSC) published its report "Fixing LIBOR: some preliminary findings". Volume I (Report)Volume II (Oral and Written Evidence)

As well as conclusions relating to the conduct of Barclays and the FSA's LIBOR investigation, the report also includes a number of points of general regulatory interest including:

  • Firms must be encouraged also to self-report.
  • The committee requires the FSA to report to it on how it will alter its supervisory efforts to counter weak compliance by firms in future.
  • The Wheatley (FSA) review should consider the case for amending the present law by widening the meaning of market abuse to include the manipulation, or attempted manipulation of LIBOR and other benchmark rates.
  • A formal and comprehensive framework needs to be put in place by the Serious Fraud Office (SFO) to ensure effective relations in the investigation of serious fraud in the financial markets.

The BoE submitted a response to the report on August 18. Response.   

FSA Consultation Paper on Restricting the Retail Distribution of UCIS

On August 22, the FSA published a consultation paper on restrictions on the retail distribution of unregulated collective investment schemes (UCIS) and close substitutes. CP12/19

In CP 12/19, the FSA outlines proposals to ban the promotion of UCIS and close substitutes to most ordinary UK retail investors. As providing financial advice generally includes making a financial promotion, by limiting the promotion of UCIS the FSA aims to limit the number of retail clients being wrongly advised to invest in UCIS.

Highlights include:

  • changing the financial promotion rules to limit the type of customer to whom firms may promote financial promotions for UCIS and closely substitutable investments;
  • Handbook guidance on the effect of the financial promotion rules on advised sales to clarify that personal recommendations generally amount to a financial promotion and, as a result of the marketing restrictions, advice on a non-mainstream pooled investment may result in an unlawful promotion if no valid exemption is available; and
  • updating the retail investment product definition to clarify the position on advice on UCIS and substitutable products in relation to Retail Distribution Review independence requirements.

Comments can be made on the proposals until November 14.

In keeping with its regulatory objective of protecting consumers, on August 17, the FSA published final notices issued to Richard Rhys and Anthony Adams, both former directors of MNFA Ltd (in liquidation), for their involvement in mis-selling a UCIS. Final Notice for Mr. RhysFinal Notice for Mr. Adams.    

Confiscation Orders Made Against Investment Banker and Wife Convicted of Insider Dealing

On August 20, Confiscation Orders (the Orders) totalling £1,534,000 were made against Christian Littlewood, a former Dresdner Kleinwort Wasserstein investment banker, and his wife Angie Littlewood. Press Release

The couple used inside information obtained through his employment to facilitate the placing of trades in eight separate stocks just prior to announcements to the market and were convicted and sentenced for insider dealing in February 2011.

The confiscation regime under the Proceeds of Crime Act 2002 (POCA) allows the court to assume that the proceeds of other trading that took place within the same period as the insider dealing represents the proceeds of crime. Both Mr and Mrs Littlewood have been ordered to pay £767,000, representing the benefit each obtained from insider dealing.

This is an example of the FSA’s increasingly tougher sanctions towards insider dealing. Tracey McDermott, director of enforcement and financial crime said “The Orders made today, coupled with the sentences previously imposed, should make it clear that insider dealing does not pay.”  

FSA Report on Assessing Sources of Systemic Risk from Hedge Funds

On August 22, the FSA published a report on assessing the possible sources of systemic risk from hedge funds, setting out the findings of the March 2012 hedge fund survey (HFS) and the April 2012 hedge fund as counterparty survey (HFACS). Report

Some of the key findings include:

  • Aggregate assets under management increased in the survey period;
  • Leverage remains largely unchanged and modest for most funds;
  • In aggregate, surveyed hedge funds report that they are able to liquidate their assets in a shorter timeframe than the period after which their liabilities would fall due; and
  • Counterparty exposures of surveyed hedge funds remain fairly concentrated among five banks.

The FSA intends to repeat the HFS in September 2012 and the HFACS in October.


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