Orrick's Financial Industry Week in Review

by Orrick, Herrington & Sutcliffe LLP
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Financial Industry Developments

SEC Proposed Rule on Security-Based Swaps

On April 17, the SEC issued a proposed rule on recordkeeping, reporting and notification requirements for security-based swap dealers and major security-based swap participants.  The proposed rule would also establish additional recordkeeping requirement for broker-dealers to account for security-based swap activities.  Comments must be submitted within 60 days after publication in the Federal Register.  SEC ReleaseSEC Proposed Rule

Rating Agency Developments

On April 17, Fitch released its criteria for rating securities backed by Federal Family Education Loan Program (FFELP) loans, including rehabilitation loans.  Fitch Report.

On April 16, Fitch released its criteria for analyzing RMBS cash flowFitch Report.

On April 14, Fitch released an exposure draft setting forth its proposed criteria for rating CMBS and commercial mortgage loans in EMEAFitch Report

On April 14, DBRS released its methodology for rating Canadian structured finance transactions.  DBRS Report.

Note: Free registration is required for rating agency releases and reports.
RMBS and Other Securities Litigation

Court Grants Bank Of America's Motion To Dismiss RMBS Action

On March 31, Judge Lewis A. Kaplan of the SDNY adopted a Magistrate Judge's Report and Recommendation, granting Bank of America's motion to dismiss an RMBS action brought by two IKB entities.  IKB asserted claims for common law fraud, negligent misrepresentation, fraudulent concealment, and aiding and abetting in connection with more than US$56 million in RMBS sold by Bank of America and Merill Lynch & Co.  The court held that IKB did not sufficiently allege falsity in connection with any of the allegedly misrepresented loan characteristics, including LTV ratios, owner occupancy ratios and departures from underwriting guidelines.  It further held that IKB did not allege scienter with sufficient particularity and did not adequately allege reliance.  OrderReport & Recommendations

RBS Wins Partial Dismissal Of Claims In RMBS Action

On April 9, Judge Paul G. Gardephe of the U.S. District Court for the Southern District of New York (SDNY) granted in part and denied in part a motion to dismiss brought by several RBS entities in an RMBS action alleging common law fraud, negligent misrepresentation, and fraudulent concealment in connection with US$243 million of RMBS.  The action was filed by the German Bank Landesbank Baden-Wittemberg and a number of special investment funds that invested in three securitizations marketed and sold by the defendants.  Judge Gardephe granted RBS's motion to dismiss plaintiffs' negligent misrepresentation, fraudulent concealment and mutual mistake claims.  He also granted RBS's motion to dismiss plaintiffs' fraud claims with respect to representations concerning LTV ratios and owner-occupancy status of the loans underlying the RMBS.  Judge Gardephe denied, however, RBS's motion to dismiss plaintiffs' fraud claims with respect to representations concerning originator compliance with underwriting guidelines and certificate credit ratings.  He also denied RBS's motion to dismiss the complaint on the pleadings for lack of standing and as time-barred.  Order.   

FGIC, BNY Mellon Announce US$950 Million RMBS Settlement with Bank Of America

In a statement released April 16, Financial Guaranty Insurance Company (FGIC) announced that it had reached a settlement with Bank of America Corp. regarding nine second-lien RMBS sponsored by Countrywide Home Loans, Inc., for which FGIC provided financial guaranty insurance.  Under the terms of the settlement, which resolves FGIC's claims concerning loans in the securitizations that allegedly breached representations and warranties, Bank of America will pay a cash settlement of approximately US$584 million to FGIC.  Bank of America separately agreed to settle claims asserted by Bank of New York Mellon, as Trustee of the underlying securitization trusts, on a trust-by-trust basis.  Bank of America has already completed settlements for seven of the nine securitizations through payment of roughly US$307 million to Bank of New York Mellon, and has agreed to pay an additional US$48 million if the settlements concerning the remaining two securitizations receive requisite investor approvals.  Press Release

Prudential's RMBS Action Against Bank of America Dismissed In Substantial Part

On April 17, Judge Stanley R. Chesler of the U.S. District Court for the District of New Jersey granted in part and denied in part a motion to dismiss brought by defendants Bank of America and Merrill Lynch in an action alleging common law and statutory claims arising from more than US$2 billion in RMBS purchased by various Prudential entities.  Judge Chesler dismissed Prudential's claims to the extent they alleged misrepresentations in connection with owner occupancy status, LTV ratios and appraisals, transfer of title to the mortgages, and certificate credit ratings.  Judge Chesler also dismissed Prudential's New Jersey RICO claim for failure to allege a distinct enterprise and Prudential's negligent misrepresentation claim, holding that New Jersey does not impose a duty of care on parties engaged in an arms' length transaction.  Judge Chesler denied defendants' motion as to Prudential's common law fraud and equitable fraud claims arising out of alleged misstatements regarding the originators' compliance with loan underwriting guidelines and as to most of Prudential's federal securities claims.  Order

Lawsuit Alleges U.S. Bank Breached Its Duties As RMBS Trustee


A lawsuit filed April 11,  in New York federal court alleges that U.S. Bank, as trustee for 25 RMBS trusts, breached its contractual and trust duties in connection with those trusts.  The action was filed as a putative class and/or derivative action by Royal Park Investments SA/NV on behalf of defunct Belgian bank Fortis Bank NA/SV and similarly situated investors.  According to the complaint, U.S. Bank was aware of thousands of loans in the RMBS trusts that breached representations and warranties in the contracts governing the securitizations and further knew that the loans were not being properly serviced.  But due to conflicts of interest, among other things, U.S. Bank failed to enforce the repurchase of allegedly defective loans or take any corrective action with respect to improper servicing.  As a result, the complaint alleges, U.S. Bank breached its obligations under the governing contracts and its duties of trust under the Trust Indenture Act and common law.  Complaint.

European Financial Industry Developments

Law360 Article: The 6 Most Important Changes To The Russian Pledge Rules

Currently, Russian civil law is undergoing a fundamental reform, comparable in extent to that carried out in the early 1990s. The main goal of this reform is to replace various outmoded legal structures inherited from the Soviet era, and to bring Russian civil law into harmony with the law of the major developed economies.  Orrick's article summarizes what we consider to be the most important of the changes in Russian Security Interest (Pledge) Law, which will become effective in 2014. 

European Parliament Approves UCITS V Directive

On April 15, the European Parliament gave its final approval to the Undertakings for Collective Investments in Transferable Securities Directive (UCITS V).  UCITS V sets out rules designed to better protect small investors from fund managers who take unnecessary or excessive risks.  Among the new rules are provisions to ensure that UCITS funds or UCITS fund managers appoint an independent "depositary" to act as a custodian of assets and to monitor deposits made by investors.  Press Release.   

European Parliament Approves MiFID II Directive and MiFIR

On April 15, the European Parliament voted to approve the text of the Markets in Financial Instruments Directive (MiFID II) and the Markets in Financial Instruments Regulation (MiFIR).

The new rules seek to close loopholes in existing legislation on financial markets.  One of the changes is that the authorities will be able to limit the size of a net position that someone can hold in commodities derivatives.

The new rules now need to be approved by the Council of the EU.  Press Release.   

European Banking Authority Publishes Opinion on European Commission's Proposed Amendments to ITS

On April 16, the European Banking Authority (EBA) published via its website an opinion dated April 4, 2014 on amendments proposed by the European Commission to the EBA's draft implementing technical standards (EBA/ITS/2013/02) (ITS) on supervisory reporting under the Capital Requirements Regulation (Regulation 575/2013).

In the opinion, the EBA agrees to the European Commission's proposal to amend the ITS so that banks would not be required to submit reports under ITS prior to the Commission Regulation adopting the ITS entering into force.  Opinion

 

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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