Orrick's Financial Industry Week In Review - June 25, 2012

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments


Independent Foreclosure Review Remediation Guidance and Extension

On June 21, the OCC and the Fed released guidance to determine the compensation or other remedy that borrowers will receive for financial injury identified during the independent foreclosure review required by consent orders issued in April 2011 to correct deficient mortgage servicing and foreclosure processes.  The agencies also announced a two-month extension to September 30 of the deadline for eligible borrowers to request a free review of their mortgage foreclosures under the independent foreclosure review.  The OCC also released its second interim report on the status of the independent foreclosure review.  Fed Release.  OCC Status Report Release.   

FHFA Proposes Rule for PACE Programs

On June 15, the FHFA, as required by a preliminary injunction from the Northern District Court of California, issued a notice of proposed rulemaking on state and local energy retrofit financing arrangements known as Property Assessed Clean Energy, or PACE.  FHFA, as conservator, had directed Fannie Mae and Freddie Mac not to purchase any mortgage where PACE financing with a priority lien was placed on the underlying property.  Comments must be submitted by July 30.  Notice of Proposed Rulemaking.

FHFA Anti-Fraud Measures for Fannie, Freddie and Federal Home Loan Banks

On June 18, the FHFA announced the Suspended Counterparty Program, an initiative to require Fannie Mae, Freddie Mac and the Federal Home Loan Banks to notify the FHFA whenever an individual or company with whom they do business is adjudicated to have engaged in fraud or other financial misconduct.  The FHFA will determine whether the individual or company should be suspended from doing business with Fannie Mae, Freddie Mac or the Federal Home Loan Banks.  The program becomes effective on August 15.  FHFA Release.   

OCC Lending Limit Rule

On June 20, the OCC adopted an interim final rule amending its lending limit rule to apply to certain credit exposures from derivative transactions and securities financing transactions.  Effective July 21, Section 610 of the Dodd-Frank Act revises the definition of loans and extensions of credit for the lending limit to include certain credit exposures from a derivative transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction. The interim final rule adopted by the OCC implements this statutory change which applies to both national banks and savings associations.  Comments on the interim final rule are due by August 6.  OCC Release.  Rule.   

Agency Guidance on Mortgage Servicing for Servicemembers

On June 21, the Fed, CFPB, FDIC, NCUA, and OCC issued guidance to mortgage servicers to address risks related to military homeowners who have informed the servicer that they have received military Permanent Change of Station orders.  If the agencies determine that a servicer has engaged in unfair, deceptive, or abusive practices, or practices that otherwise violate Federal consumer financial laws and regulations, the agencies will take supervisory and enforcement actions.  Guidance.  Fed Release.

LSTA and ABA Provide Comments to Proposed Leveraged Lending Guidelines

On March 30, the Fed, OCC and FDIC issued Proposed Guidance on Leveraged Lending.  On June 8, 2012, the LSTA, together with the American Bankers Association (ABA), responded with comments to such guidelines.  The comments suggested that more modest changes to the current leveraged finance guidance would allow banks to continue to safely manage the risks of leveraged finance without imposing undue burdens.  Generally, the comments noted the costs of implementing the guidelines in comparison to the potential benefits and emphasized that the guidelines are only recommendations that need to remain flexible enough for implementation by a variety of lending institutions across the broad spectrum of leveraged lending transactions. Proposed Guidance.  LSTA and ABA Comments.  

SEC Rule for Listing Standards for Compensation Committees and Advisers

On June 20, the SEC approved a rule that  directs national securities exchanges to adopt listing standards for public company boards and compensation advisers.  The new rule, required by the Dodd-Frank Act, requires exchange listing standards to address: (i) the independence of members on a committee; (ii) the committee’s authority to retain compensation advisers; (iii) the committee’s consideration of the independence of any compensation advisers; and (iv) the committee’s responsibility for the appointment, compensation, and oversight of the work of any compensation adviser.  These changes will take effect 30 days after publication in the Federal Register.  No later than 90 days after effectiveness, each exchange that lists equity securities must propose listing standards that comply with the new rule.  The new listing standards must be approved by the SEC within one year of the new rule becoming effective.  SEC Release.  Rule.   

Rating Agency Developments


On June 20, Fitch updated its criteria for letter of credit-supported bonds.  Fitch Report.

On June 20, DBRS released its criteria for market-linked securities.  DBRS Report.

On June 20, DBRS released its criteria for representations, warranties, covenants, and events of default in trust indentures.  DBRS Report.

On June 20, DBRS released its criteria for guarantees and other forms of explicit support.  DBRS Report.

On June 20, DBRS released its criteria for Canadian bankruptcy and restructuring legal considerations.  DBRS Report.

On June 20, Fitch updated its availability-based infrastructure project rating criteria.  Fitch Report. 

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

Asset Management


SEC Approves New FINRA Communications Rules

On June 14, the SEC approved the adoption by FINRA of final rules governing member firms’ communications with the public.  The final rules include general contact standards, such as requiring communications to provide a sound basis for evaluating the facts with respect to a security, as well as content standards that apply to specific issues or securities.  The final rules will be effective on February 4, 2013.  FINRA Notice.  FINRA Rules.

RMBS Litigation


Sixth Circuit Affirms Dismissal of RMBS Case Against Bear Stearns

On June 20, 2012, the Sixth Circuit affirmed an order by the Western District of Kentucky granting Bear Stearns’s motion to dismiss claims brought against it by Republic Bank & Trust Co. arising out of Republic Bank’s purchase of $52 million in RMBS.  The Sixth Circuit’s ruling largely rested on Republic Bank’s failure to plead its claims with the required particularity.  Specifically, the court found that allegations that prudent loan underwriting standards had not been followed and that property valuations were inaccurate were too general and not sufficiently tied to the loans backing the particular securities Republic Bank purchased.  The court also found that many of the facts that Republic Bank alleged to have been misrepresented were in fact disclosed in the offering documents for the securities.  Republic Bank admitted it had not read the offering documents prior to its purchases, conduct the court criticized as in dereliction of Republic Bank’s duty to exercise ordinary diligence.  Opinion.  

Syncora Permitted to Prove its Breach Claims Without Showing That Alleged Breaches Caused Loans to Default

On June 19, 2012, Judge Paul Crotty of the Southern District of New York granted in part Syncora Guarantee Inc.’s motion for partial summary judgment concerning the showing necessary to prove its claims for breach against EMC Mortgage Corporation.  Syncora’s claims arise out of allegedly false representations and warranties concerning the quality of loans underlying $666 million in RMBS that Syncora insured.  Without addressing the merits of Syncora’s claims, Judge Crotty ruled that Syncora does not need to prove that the alleged breaches caused any of the alleged defaults that occurred in the loans underlying the RMBS in order to prevail on its claim.  Instead, proof that there had been a material breach would be sufficient to entitle Syncora to invoke its repurchase remedy under the parties’ agreement.  Similarly, Judge Crotty ruled that Syncora could prove materiality by demonstrating that the breach increased Syncora’s risk of loss, and also ruled that Syncora did not need to prove that the breach caused a loan to default in order to prove materiality.  The court held that inaccurate and incomplete information impacts an insurer’s decision whether to issue a policy and at what price and thus adversely affects the insurer’s interest as a matter of law.  The court also denied Syncora’s request for a ruling that the court has the power in equity to award relief equivalent to rescission, which the court found would have required factual determinations for which there is no support in the record at this time.  Order.

European Financial Industry Developments


Blue Index Trio Sentenced for Insider Dealing

On 20 June 2012, the FSA announced that three individuals with links to Blue Index Ltd, a contract for difference brokerage, had been sentenced for insider dealing.  James Sanders, a director of Blue Index, was sentenced to four years in custody and disqualified as a director for five years.  This is the longest sentence imposed for insider dealing in recent years. FSA Press Release

Miranda Sanders, James Sanders' wife, was sentenced to ten months in custody.  This is evidence of the UK's tough stance on insider dealing and shows that spouses who actively participate in insider dealer cannot expect leniency even if they have young children.

James Swallow, another director of Blue Index, was also sentenced to ten months in custody. The U.S. Department of Justice and the SEC worked alongside the FSA to ensure a successful joined up investigation.

FSA Annual Report for 2011/12 Published

On 19 June 2012, the FSA published its Annual Report for 2011/12.  The report is a key component of the FSA's accountability framework.  The report deals the performance of the FSA during 2011/12 and compares this against the priorities listed in its business plan. FSA Annual Report.

This will be the FSA's last annual report before the Prudential Regulation Authority and the Financial Conduct Authority take over as ‘twin peak’ regulators in early 2013. 

The FSA measures market cleanliness by looking at the level of abnormal price movements prior to company announcements.  This declined from 21.2% in 2010 to 19.8% in 2011.  The 2011 level is the lowest since 2003.

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EU Council Compromise Proposals on EMIR and MiFID II

On 21 June 2012, the Presidency of the Council of the EU published compromise proposals (dated 21 June 2012) on MiFID II and EMIR. Both compromise proposals state that the proposals have been prepared following discussions in meetings of the working party on financial services. Compromise Proposal on MiFID IICompromise Proposal on EMIR.  

FSA Letter on Monitoring Ongoing Appropriateness of Solvency II Internal Models

On 18 June 2012 the FSA published a letter (dated 13 June 2012) from Julian Adams, FSA Director of Insurance, to firms involved in the FSA's internal model approval process (IMAP) in preparation for the implementation of the Solvency II Directive. Letter.

The letter sets out the FSA's thinking on how it will monitor the ongoing appropriateness of internal models after approval. Highlights include:

  • The FSA expects firms to have systems and controls in place to ensure that the internal model operates properly on a continuous basis at all times, including stressed market conditions.
  • The FSA is developing a number of early warning indicators (which may take the form of ratios or ranges) to help it and firms ensure that, after approval, internal models and the solvency capital requirement (SCR) calculation remain appropriate.



PLI’s Internal Investigations 2012: How to Protect Your Clients or Companies in the Global, Post-Dodd Frank World

Mike Delikat, chair of Orrick's Employment Law practice, will be speaking at PLI's Internal Investigation program on June 26 in New York. This program will discuss how to conduct an internal investigation, in-house or outside; considerations at the outset: nature and scope of the investigation; how to conduct the investigation: considerations, processes and procedures; the government's use, evaluation and weighing of internal investigations; how to conclude the investigation: when and how to prepare a report, alternatives, corrective actions; and ethical issues and how to deal with them. For more information, please click here.  


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Orrick, Herrington & Sutcliffe LLP

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