Orrick's Financial Industry Week in Review - December 5, 2011

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments


Central Banks Increase Liquidity Support to Global Financial System

On November 30, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Fed and the Swiss National Bank announced coordinated actions to increase their capacity to provide liquidity support to the global financial system. Pricing on existing temporary U.S. dollar liquidity swap arrangements will be lowered by 50 basis points to a rate of the U.S. dollar overnight index swap rate plus 50 basis points, and the central banks will establish temporary bilateral liquidity swap arrangements to offer liquidity in non-domestic currencies other than the U.S. dollar. Fed Release.

OCC Proposed Rule to Remove References to Credit Ratings

On November 29, pursuant to Section 939A of the Dodd-Frank Act, the OCC proposed a rule to remove references to credit ratings from various regulations and related guidance. In addition, the OCC issued proposed guidance on the procedures banks should follow in order to demonstrate that their investments satisfy the new credit quality standards created by the proposed rule. Comments must be submitted by December 29. OCC Release. OCC Proposed Rule. OCC Proposed Guidance.

FHFA Retains Maximum Conforming Loan Limits

On November 22, the FHFA announced that the maximum conforming loan limits for mortgages acquired by Fannie Mae and Freddie Mac in 2012 will remain at existing levels (which were decreased in October) except in Fairfield County, Connecticut, where the loan limit will increase. FHFA Release. 

Fed Adopts Final Rule on Annual Capital Plans

On November 22, pursuant to Section 165 of the Dodd-Frank Act, the Fed adopted a final rule amending Regulation Y to require bank holding companies with total consolidated assets of $50 billion or more to submit annual capital plans for review. The final rule also requires these banks to obtain approval from the Fed under certain circumstances before making a capital distribution. The final rule will be effective on December 30 and covered banks must submit their capital plans by January 9, 2012. Fed Release. Fed Final Rule.

Bankruptcy Rule 2019 Effective Date

On December 1, Bankruptcy Rule 2019 became effective. This rule relates to the disclosure requirements in Chapter 9 and Chapter 11 cases for holders of distressed loans and eliminates the requirement for the disclosure of the price paid for a claim in bankruptcy and the date the claim was acquired (except in very limited circumstances) in Rule 2019 verified statements. Rule 2019.

Joint Task Force on HAMP Mortgage Modification Scams

On December 1, SIGTARP, the Consumer Financial Protection Bureau, and Treasury created a joint task force to deal with scams targeted at homeowners seeking HAMP modifications. The joint task force issued a fraud alert which will be provided directly to homeowners eligible for HAMP. Treasury Release. Consumer Fraud Alert.

SEC Approves FINRA Amendments to TRACE Reporting Requirements

On November 21, the SEC approved amendments to FINRA Rule 6730 regarding member firms' reporting obligations for transactions in TRACE-eligible securities (other than ABS).  The amendments were made in connection with the consolidation of all TRACE-eligible securities transaction processing and data management on FINRA's new multi product platform. The rule amendments will be effective on February 6, 2012. FINRA Release. FINRA Amended Rule.

Rating Agency Developments

On December 2, Moody's updated its approach to rating fleet lease-backed ABS. Moody's Report.

On December 1, Fitch released its surveillance criteria for U.S. CRE CDOs and CMBS large loan floating-rate transactions (floating-rate CMBS pools which have up to 50 loans remaining). Fitch Release.

On December 1, S&P requested comments on its methodology for rating U.S. public finance long-term municipal pools. S&P Release.

On November 29, S&P released definitions and related analytic practices for covenant and payment provisions in U.S. public finance revenue obligations. S&P Release.

On November 29, S&P released its rating approach for U.S. public finance obligations with multiple revenue streams.  S&P Release.

On November 29, S&P revised its methodology for rating U.S. ABS auto lease securitizations. S&P Release.

On November 29, Fitch published updated criteria for rating linkages in nonbank financial subsidiary relationshipsFitch Release.

On November 21, S&P released a request for comments on a proposed expansion to its methodology and assumptions for assessing derivative obligations and certain amendments to other aspects of counterparty and supporting party risk criteria. S&P Release. 

Note: Free registration is required for Moody's, Fitch and S&P releases and reports.  

Recent Orrick Alerts

First Report of SEC's Whistleblower Office Contains Some Surprises

On November 16, 2011, the SEC's Office of the Whistleblower released its first annual report to Congress, as required by section 924(d) of the Dodd-Frank Act. The report only includes information about tips received after the final rules implementing the program became effective on August 12, 2011. As a result, it only includes seven weeks of data. Still, the information provides useful insights into the number and types of whistleblower complaints being received and some insights into the Office's staffing and activities to date. 
Click here to read more.

RMBS Litigation

SDNY Judge Rejects Proposed SEC-Citigroup Settlement

On November 28, 2011, U.S. District Judge Jed S. Rakoff of the Southern District of New York refused to approve a proposed settlement between the SEC and Citigroup Inc. in connection with Citigroup's alleged shorting of RMBS that it marketed and sold to the public on the grounds that the settlement was "neither fair, nor reasonable, nor adequate, nor in the public interest." The settlement involved the payment of a total of $285 million by Citigroup, as well as the imposition of certain injunctive measures against Citigroup.  In rejecting the settlement, Judge Rakoff stringently criticized the SEC's policy – "hallowed by history, but not by reason" – of allowing settling defendants to neither admit nor deny wrongdoing because it "deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact." He stressed that the exercise of judicial power and authority that does not rest on facts cannot serve the public interest because it "is worse than mindless, it is inherently dangerous." Judge Rakoff consolidated the action with a related matter filed by the SEC against a Citigroup employee and directed the parties to be ready to try the case beginning on July 16, 2012. Order.

New York and Delaware Attorneys General Permitted to Intervene in Bank of America Settlement Approval Proceeding

On November 18, 2011, U.S. District Judge William H. Pauley III of the Southern District of New York granted the requests of the attorneys general of New York and Delaware to intervene in the proceeding seeking approval of an $8.5 billion settlement between Bank of America Corp. and the Bank of New York Mellon, as trustee for several trusts that issued Countrywide Financial Corp. RMBS certificates. The Court found that the intervention of the state AGs would protect the interests of absent investors. In the same order, the Court denied requests to intervene brought by four individual homeowners who are obligors on mortgages owned by one or more of the trusts covered by the proposed settlement agreement. The Court found that the homeowners lacked a direct financial interest in the outcome of the case and could not establish any potential prejudice they might suffer by not being permitted to participate in the settlement approval proceeding. Order.

New Mexico Federal Judge Largely Denies Motion to Dismiss in Thornburg Mortgage RMBS Case

On November 12, 2011, Judge James O. Browning of the United States District Court for the District of New Mexico issued a 273-page order granting in part and denying in part motions to dismiss brought in a putative class action against certain Thornburg Mortgage RMBS trusts, underwriters, individual defendants, and rating agencies. The plaintiff brought common law claims as well as state and federal securities claims. The Court rejected the defendants' argument that a plaintiff class had standing to sue only with respect to those tranches of an RMBS offering in which a named plaintiff purchased certificates. The Court also concluded that credit ratings are statements of opinion, but rejected the rating agencies' argument that those are protected by the First Amendment. Order.

NCUA Sues Wachovia Over Credit Unions' RMBS Investments

On November 28, 2011, the National Credit Union Administration ("NCUA"), an independent federal agency that supervises and charters federal credit unions, filed a complaint in the federal district court for the District of Kansas against Wachovia Capital Markets LLC. NCUA is suing in its capacity as the liquidating agent of two failed credit unions, U.S. Central Federal Credit Union ("U.S. Central") and Western Corporate Federal Credit Union ("WesCorp").  NCUA seeks approximately $200 million in damages based on alleged untrue statements and omissions in the offering documents for 5 RMBS purchased by U.S. Central and WesCorp. NCUA asserts causes of action under Sections 11 and 12(a)(2) of the federal Securities Act, as well as violations of the California and Kansas securities laws. Complaint.

Insurer Seeks Rescission and Damages in Connection with Coverage for $3.8 Billion in RMBS

On November 29, 2011, the Financial Guaranty Insurance Co. ("FGIC") filed three lawsuits in New York state court against the mortgage divisions of Ally Financial. FGIC alleged that GMAC and the Residential Funding Company misrepresented to FGIC the quality of loans underlying RMBS valued at $3.8 billion in order to obtain insurance policies from FGIC that were purportedly necessary for the RMBS to be given a AAA credit rating. FGIC's insurance policies guaranteed principal and interest payment on the securities at issue. FGIC asserts a number of causes of action in each case, including claims for various contractual breaches, fraudulent inducement, and tortious interference. Complaint A. Complaint B. Complaint C.

German Bank Sues JP Morgan Over $2.1 Billion in RMBS

On November 21, 2011, German bank Bayerische Landesbank ("BayernLB") filed a complaint in New York state court against JPMorgan Chase & Co. and several related entities, including several former Washington Mutual and Bear Stearns entities, seeking approximately $2.1 billion in damages in connection with its purchase of certificates in 57 RMBS offerings. BayernLB asserts causes of action for common law fraud, fraudulent inducement, aiding and abetting fraud, negligent misrepresentation, and successor and vicarious liability, based on allegations that JPMorgan concealed the poor quality of loans underlying those securities and provided misinformation to credit rating agencies.  Complaint. 

Court Grants Unopposed Motion for Class Certification in $2.5 Billion Countrywide RMBS Lawsuit

On November 29, 2011, Judge Mariana R. Pfaelzer of the Central District of California issued an order certifying a class of Countrywide Financial Corp. investors in an action alleging that Countrywide made misrepresentations in connection with the sale of certain RMBS. On September 30, 2011, the plaintiffs and defendants stipulated to a proposed class that was consistent with the Court's rulings on various motions to dismiss, which had significantly narrowed the scope of the potential class plaintiffs originally sought to represent. The Iowa Public Employees' Retirement System was named lead plaintiff on behalf of a class of purchasers of eight different tranches of Countrywide RMBS. Order.

European Financial Industry Developments


FSA Releases Proposed Guidance And Warns Against Retail Sales of 'Toxic' Death Bonds

On 28 November, 2011, the Financial Services Authority released proposed guidance on traded life policy investments (TLPIs) and at the same time issued a strong warning that TLPIs are not to be marketed to UK retail investors. The FSA points to serious problems with how  the TLPIs are designed, marketed and sold, considering them to be "toxic products" unlikely to be suitable for the majority of retail investors. The FSA has stated that it ultimately aims to ban TLPIs from the UK retail market. FSA Press Release. Guidance Consultation

FSA Issues £14,000 Fine and Ban Against Hedge Fund Compliance Officer

On 18 November, 2011, the Financial Services Authority fined Dr Sandradee Joseph, a former Compliance Officer at hedge fund company Dynamic Decisions Capital Management, £14,000 for failing to exercise due skill, care and diligence in managing the business of the firm for which she was responsible in her CF10 controlled function (Principle 6 of the FSA's Statement of Principles for Approved Persons). The FSA also banned Dr Joseph from performing any significant influence function in regulated financial services, considering that she did not meet FSA's fit and proper test. FSA Press Release. Final Notice to Dr Sandradee Joseph.


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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