Orrick's Financial Industry Week in Review - August 12, 2013

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Financial Industry Developments

FHFA Input on Freddie Mac and Fannie Mae Multifamily Businesses

On August 9, the FHFA announced that it is seeking public input on strategies to reduce Fannie Mae and Freddie Mac's presence in the multifamily housing market and is seeking input on various proposed alternatives.  Input must be received within 60 days or not later than October 8.  FHFA Release and Proposal.

Broker-Dealers: The New Frontier for SEC Enforcement

The SEC adopted new rules designed to increase protections for customers who invest money and securities with broker-dealers.  Recent rulemaking and statements made by the SEC have highlighted the fact that broker-dealer regulation is becoming a growing area of SEC interest.  In connection with Wednesday's vote, SEC Chair Mary Jo White stated that "[i]nvestors need to feel confident that their money is safe when it's being held by their broker-dealers… [and] these rules will strengthen the audit requirements for broker-dealers and enhance [the SEC's] oversight of the way they maintain custody over their customer's needs."   The new rules amend the broker-dealer reporting and notification rules codified in Section 17 and Rules 17a-5 and 17a-11 of the Exchange Act.  They also require that the broker-dealer let the SEC review the work-papers of the accountant, if requested.  For more information and to visit our Securities Litigation blog, please click here.

Rating Agency Developments

On August 9, Fitch released its U.S. RMBS re-REMIC criteria.  Fitch Report.   

On August 9, Fitch released its U.S. RMBS loan loss model criteria.  Fitch Report

On August 8, Fitch released its criteria for rating corporate CDOsFitch Report

On August 7, Fitch released its criteria for analyzing multiborrower pools of commercial real estate (CRE) loans with U.S. CMBS transactions.  Fitch Report

On August 5, Fitch released its criteria for rating currency swap obligations of an SPV in structured finance transactions and covered bonds.  Fitch Report

On August 2, Fitch released its criteria for repackaged senior structured finance notes.  Fitch Report.   

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

RMBS and Other Securities Litigation

SEC and DOJ File Parallel Civil Suits Alleging BofA Defrauded RMBS Investors

On August 6, the SEC and the U.S. Department of Justice filed parallel civil suits against several Bank of America affiliates, alleging that the bank defrauded investors in connection with its packaging and sale of US$850 million in RMBS.  The actions, both filed in the Western District of North Carolina, allege that BofA misled investors by failing to disclose information concerning the quality of the loans backing the RMBS, including their origination channel, misrepresenting compliance with underwriting guidelines, and making other false statements in loan tapes and free writing prospectuses filed with the SEC.  The SEC sued BofA for alleged violations of Sections 17(a)(2), 17(a)(3), and 5(b)(1) of the Securities Act of 1933.  SEC Complaint.  The DOJ sued BofA for alleged violations of Sections 1001 and 1014 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989.  DOJ Complaint

Deutsche Bank Sued for Fraud in Connection with US$535 Million in RMBS

In a lawsuit filed in New York State Court on August 5, Royal Park Investments SA/NV (RPI) alleged that several Deutsche Bank affiliates fraudulently induced it to invest in more than US$535 million worth of RMBS in connection with 18 different offerings.  RPI alleges that the offering documents for the RMBS contained material misrepresentations and omissions concerning compliance with underwriting guidelines, loan-to-value ratios, owner occupancy rates, credit ratings, and transfer of title of the underlying mortgage loans.  RPI further alleges that Deutsche Bank knew its representations were false but concealed that information and even used it to take a short position on different RMBS while still marketing these RMBS certificates to RPI as a good investment.  RPI asserts claims for common law fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation, and rescission based on mutual mistake.  Complaint

JP Morgan Discloses Investigation of MBS Practices 

In its Form 10-Q filed with the SEC on August 7, JP Morgan Chase & Co. disclosed that it is responding to parallel criminal and civil investigations by the U.S. Attorney's Office for the Eastern District of California relating to subprime and Alt-A RMBS securitized and sold by JPMorgan between 2005 and 2007.  The investigations follow a May 2013 notice from the civil division of the U.S. Attorney's Office that the division preliminarily concluded that JPMorgan violated certain federal securities laws in connection with those offerings.  10-Q Excerpt.

European Financial Industry Developments

ESMA Publishes Q&As on EMIR

On August 8, the European Securities and Markets Authority (ESMA) published Questions and Answers on the implementation of Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR).

ESMA's statutory role is to build a common supervisory culture by promoting common supervisory approaches and practices.  The Q&As were published to achieve a consistent application of EMIR.  The first version of this document was published on March 20, and the second version on June 6.  This document is expected to be updated and expanded as and when appropriate.

This version of the Q&As provides guidance on a number of issues including clarification on calculation of the clearing threshold, the nature of segregation and portability and the requirements for registration of trade repositories.  Q&As

Banking Liaison Panel Publish Annual Report

On August 5, the Treasury published the annual report of its Banking Liaison Panel for 2012-13.  The Panel advises the Treasury about the effect of the special resolution regime (SRR) (established under the Banking Act 2009) on banks, the financial markets and those doing business with banks.

The report looks at the work that the panel will be doing for the remainder of 2013 and 2014, which concerns non-bank resolution regimes and EU legislative proposals on the Recovery and Resolution Directive (RDD) and the euro banking union.  The Panel also expects to review the findings of the second phase of the statutory review of the special administrative regime (SAR) for investment banks.  Annual Report

FSMA (OTC Derivatives, CCPs and TRs) (No. 2) Regulations Published

On August 5, the Financial Services and Markets Act 2000 (FSMA) (OTC Derivatives, Central Counterparties (CCPs) and Trade Repositories (TRs)) (No. 2) Regulations 2013 SI 2013/1908 were published.  The regulations were made on July 30, and the majority of the regulations will come into force on August 26.

The regulations relate to the clearing of financial transactions through recognized clearing houses.  The regulations implement in part Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) and amend the following:

    • Supervisory, investigatory and enforcement powers of the Bank of England and the Financial Conduct Authority.
    • Companies Act 1989 to facilitate segregation and transfer of indirect clients' assets and positions.
    • Financial Services and Markets Act 2000 (Recognition Requirements for Investment Exchanges and Clearing Houses) Regulations 2001(S.I. 2001/995) (the Recognition Requirements Regulations).  They impose new requirements on recognized central counterparties and recognized clearing houses, which are not central counterparties.  Regulations

ESMA Publishes Final Report on Reporting to Trade Repositories Under EMIR

On August 8, the European Securities and Markets Authority (ESMA) published its final report to the European Commission proposing that the start date for reporting exchange traded derivatives to trade repositories be postponed by one year to January 2015.

ESMA proposes to amend Article 5 of the Commission's Implementing Regulation (1247/2012), which sets out the implementing technical standards (ITS) on the format and frequency of reporting to trade repositories under the Regulation on OTC derivative transactions, central counterparties and trade repositories (Regulation 648/2012) (EMIR).

The current reporting start dates in Article 5 do not distinguish the methods of trading (exchange traded derivatives as against over-the-counter).  ESMA believes that specification of exchange traded derivatives is necessary to ensure harmonized reporting.  The delay allows ESMA time to develop guidelines and recommendations to ensure that reporting is consistent and capable of being efficiently used, and will allow time for their implementation by counterparties, trade repositories and regulators.  Final Report

Russian Note Trustee (a Bondholders Representative) and Other Changes in Corporate Bond Regulations

This Orrick law alert relates to the changes made in the Russian securities law by Federal Law No. 210-FZ dated July 23 (On Amendments to the Federal Law on the Securities Market and to Certain Russian Laws and Regulations).  Specifically, said Law has introduced the concept of a bondholders' representative and expanded the concept of a general meeting of bondholders.  The new amendments also set out in more detail how to redeem or repurchase Russian bonds before maturity.  Orrick has actively assisted the Association of Russian Regional Banks in the drafting and promotion of the new law.  For the complete alert, please click here

Events

Financial Industry Breakfast Briefing: Derivatives Market Update – Where Things Stand

On September 10, Orrick will host a Financial Industry Breakfast Briefing in our New York office.  The briefing will cover the current state of the derivatives market with specific updates on the implementation of Dodd-Frank and recent litigation involving derivatives.  Speakers include partners Steven FinkNikiforos Mathews and Thomas Mitchell.  This course has been approved in accordance with the requirements of the Continuing Legal Education Board for a maximum of 1.0 credit hour.  To register for this event, please click here.