Orrick's Financial Industry Week In Review - July 23, 2012

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments


NY Fed Releases Money Market Fund Reform Staff Report

On July 19, the NY Fed issued a staff report on money market fund reform to address the equitable distribution of withdrawals out of a distressed fund.  Currently, fundholders who redeem early receive the full amount of their investments, leaving later redeemers to bear any losses.  The report contains several proposals that would disincentivize runs on distressed funds.  NY Fed Release.   NY Fed Paper.

SIFMA Statement on Eminent Domain and TBA Trading

On July 19, SIFMA announced a new policy that mortgage loans to borrowers residing in jurisdictions that have initiated condemnation proceedings to seize mortgage loans through eminent domain will not be deliverable into TBA-eligible securities on a going-forward basis.  SIFMA stated that mortgage loans in areas where these eminent domain powers could be exercised would exhibit unpredictable prepayment behavior and destroy the homogeneity among mortgage loans necessary for the proper functioning of the TBA market.  In the event that seizures of mortgage loans occur, SIFMA plans to review the facts and circumstances of the situation periodically and will review its policy in light of any changes.  Statement.   

SEC Guidance on Ratings and Standards of Creditworthiness

On July 17, the SEC published interpretive guidance for the definitions of “mortgage related security” and “small business related security” of the Securities Exchange Act of 1934 in light of Section 939(e) of the Dodd-Frank Act which removed provisions in these definitions which referred to credit ratings and inserted new text that provided that, to satisfy the definitions, a security must meet standards of creditworthiness established by the SEC.  The SEC is providing a transitional interpretation that will be applicable from July 20 until final rules establishing new standards become effective.  Under the transitional interpretation, the standard of creditworthiness for “mortgage related security” continues to mean a security that is rated one of the two highest rating categories by at least one NRSRO and, for “small business related security”, one of the four highest rating categories by at least one NRSRO.  The SEC is also seeking comments, due by 30 days after publication in the Federal Register, on potential standards of creditworthiness.  SEC Guidance.    

CFTC Approves Rules for Funds Held by Futures Commissions Merchants

On July 13, the CFTC approved rules submitted by the National Futures Association for customer funds held by futures commissions merchants.  The new rules require futures commissions merchants to strengthen controls over the treatment and monitoring of funds held for customers trading on U.S. contract markets and for funds held for foreign futures and foreign options customers trading on foreign contract markets. CFTC Release.  

CFTC Swap No-Action Relief for Registration and Compliance

On July 13, the CFTC announced time-limited no-action relief for commodity pool operators (CPOs) and commodity trading advisors (CTAs) who have been exempt or excluded from registration but, because of recent amendments to Commission Regulations 4.13 and 4.5, now need to register and satisfy compliance obligations.  Under the relief, the CFTC will not take will not take enforcement actions against CPOs or CTAs for failure to register until December 31, subject to satisfaction of requirements including filing of a notice.  CFTC Release.  

SEC Final Report on Global Accounting Standards

On July 13, the SEC's Office of Chief Accountant published its final staff report on the Work Plan related to the potential adoption of global accounting standards.  The Work Plan was published in February 2010 to consider factors relevant to a determination as to whether, when, and how the current financial reporting system for U.S. issuers should transition to a system incorporating International Financial Reporting Standards (IFRS).  The SEC currently has no timeframe to decide whether to switch to IFRS, so it's uncertain when that decision will be made.  SEC Release.    SEC Report.   

Guidance to Servicers for Making Home Affordable

On July 13, Treasury issued a supplemental directive to provide guidance to servicers for compliance with the requirements of the Dodd-Frank Act and Making Home Affordable requirements related to borrower identity and owner-occupancy for non-GSE mortgages.  Guidance.  

HUD Accepting Applications to Purchase Troubled Mortgages

On July 13, HUD announced that applications may be submitted for the Distressed Asset Stabilization Program to purchase pools of severely distressed loans formerly insured by the FHA.  Approximately 3,500 loans will be sold in four metropolitan areas: Chicago, IL; Newark, NJ; Phoenix, AZ; and Tampa, FL.  HUD Release.     

Rating Agency Developments


On July 18, Moody’s updated its methodology for Public Sector Pool FinancingsMoody’s Methodology.

On July 17, DBRS updated its methodology for Asset Management CompaniesDBRS Methodology.

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

RMBS Litigation


Court Denies Morgan Stanley’s Motion to Dismiss RMBS Class Action

On July 16, Judge Laura Swain of U.S. District Court for the Southern District of New York denied Morgan Stanley’s motion to dismiss a class action suit that alleges misrepresentations and omissions in the offering documents for numerous mortgage-backed securities.  In its motion, Morgan Stanley argued that the claims were time-barred under the one-year statute of limitations for violations of Section 11 and Section 12(a)(2) of the 1933 Securities Act because, among other reasons, numerous news reports had been published more than one year before the complaint was filed that put Plaintiffs on inquiry notice of their claims.  Judge Swain held that the statute of limitations begins running only when a plaintiff could have pled claims with sufficient particularity to state a facially plausible claim.  In this context, she held that the earliest that could have occurred was when the securities at issue were downgraded to below investment-grade.  She further held that while the news reports cited by Morgan Stanley painted a vivid picture of a distressed MBS industry, none of the reports referred to the entities involved in the origination or securitization of the loans backing Plaintiffs’ investments and therefore they did not provide Plaintiffs with sufficient information to state a facially plausible claim.  Order.

Bank of America Settles Syncora RMBS Action for $375 Million

On July 17, Bank of America agreed to settle a case brought in New York state court by insurer Syncora Guarantee for $375 million.  The settlement also includes a transfer of assets from Syncora to Bank of America subsidiaries and a corresponding transfer of preferred shares, surplus notes, and other securities from Bank of America subsidiaries to Syncora.  Syncora filed suit against Bank of America in 2009, alleging that Countrywide Financial misrepresented the quality of mortgages underlying securities that Syncora insured.  Press Release.

Federal Court Orders Bayerische Landesbank RMBS Lawsuits Back to State Court

On July 16, Judge Lewis A. Kaplan of U.S. District Court for the Southern District of New York remanded suits brought by Bayerische Landesbank against Bear Stearns and Merrill Lynch to the Supreme Court of the State of New York, where they were originally filed.  The lawsuits allege that Defendants knowingly made misrepresentations in RMBS offering materials concerning the underwriting standards used in connection with the underlying mortgage loans.  Defendants sought removal to federal court on the ground that the cases were related to bankruptcy proceedings of the originators of some of the underlying mortgages.  Judge Kaplan’s remand order indicated that a further written order may be forthcoming.  Order. Notice of Removal.

European Financial Industry Developments


Parliamentary Commission on Banking Standards Appointed

On July 18, Parliament published a press release announcing that a parliamentary commission on banking standards has been appointed. Press Release

The commission will consider and report on:

  • Professional standards and culture of the UK banking sector, taking account of regulatory and competition investigations into the London Interbank Offered Rate (LIBOR) rate-setting process.
  • Lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for government policy.

The commission has been asked to report on legislative action no later than December 18 (before the Banking Reform Bill is published) and on other matters as soon as possible afterwards. 

Amendments to Money Laundering Regulations 2007 to Come into Force on October 1

On July 17, HM Treasury published the Government’s response to its consultation on proposed changes to the Money Laundering Regulations 2007 (MLRs) together with its Impact Assessment (June 20). Response.  Impact Assessment

The Government’s proposals aim to reduce the regulatory burden imposed by the MLRs, while strengthening the overall anti-money laundering (AML) regime. Among the proposals the Government plans to:

  • Retain the criminal penalties in the MLRs (even for minor breaches of the MLRs).
  • Remove the current distinction between bodies listed in Parts 1 and 2 of the MLRs for customer due diligence (CDD) reliance purposes.
  • Strengthen and clarify the powers of the Office of Fair Trading and HMRC.
  • Make the FSA the recognised formal supervisor for recognised investment exchanges (RIEs).

EBA Publishes Opinion on Green Paper on Shadow Banking

On July 17, the European Banking Authority (EBA) published its opinion on the European Commission's green paper on shadow banking.  Opinion.  The opinion focuses on several key areas, including the following:

  • The definition of shadow banking- The EBA agrees with the definition of shadow banking proposed in the Financial Stability Board's recommendations in April 2011.  Recommendations.
  • Functional approach – The EBA recognised that shadow banking has beneficial effects on the financing of the real economy and can help to foster growth.  However, there are functional risks which need to be properly regulated.  The EBA classifies these risks as liquidity and maturity transformations, interconnectivity and excessive leveraged positions set up by shadow entities or instruments.
  • Large exposures – The EBA believes that the large exposures regime should act as a backstop regime to "shadow activities" and tackle the risk of interconnectivity by ensuring that interconnections are duly identified.
  • Regulatory arbitrage – The EBA stands ready to prevent regulatory arbitrage and assess the need for regulation ability.  The risks of regulatory arbitrage could increase as a response to the overhaul of the ongoing requirements under Basel III.

HM Treasury Consults on Reform of UK Payments Industry

On July 19, HM Treasury published a consultation paper on the future regulation of the UK payments industry.  The payments industry is central to the functioning of the economy, but the government believes it has not always responded effectively to the needs of consumers.  The consultation paper details three options for reforming the regulation and governance of payment networks.  The government's preferred option would be to create a new public body called the Payments Strategy Board (PSB), which would set the strategy across the industry.  This would be overseen by the Financial Conduct Authority and funded through a levy collected by the new regulator.  The government will accept comments on its proposals until October 10. Consultation paper.



Renewable Backed Securities: Funding for Solar Projects

On August 1 in New York, Partner Howard Altarescu  will participate in a roundtable discussion hosted by Agrion relating to securitization and other financings of solar contracts.  For more information, please click here. Please contact Ania Mirek at amirek@orrick.com if you are interested in attending, and comply with the criteria that you are a “non-member who has never attended an AGRION event previously.”


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Orrick, Herrington & Sutcliffe LLP

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