Orrick's Financial Industry Week In Review - September 4, 2012

by Orrick, Herrington & Sutcliffe LLP

Financial Industry Developments


Eliminating General Solicitation and Advertising Prohibitions under Rule 506 and Rule 144A

On August 29, the SEC proposed a rule to implement Section 201(a) of the JOBS Act that would amend Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933.  The proposed amendment to Rule 506 would eliminate the prohibition against general solicitation and general advertising in Rule 506 offerings if all purchasers are accredited investors.  The proposed amendment to Rule 144A would allow offerings to non-qualified institutional buyers so long as the seller reasonably believes that all purchasers are qualified institutional buyers.  Comments should be received within 30 days after publication in the Federal Register.  SEC Release.  SEC Proposed Rule.   

FIA and ISDA Cleared Derivatives Addendum

On August 29, the Futures Industry Association (FIA) and ISDA announced publication of the FIA-ISDA Cleared Derivatives Addendum, a template that can be used by U.S. futures commission merchants (FCMs) and their customers to document their relationship with respect to cleared OTC swaps.  The Addendum supplements a futures and options agreement between a U.S. FCM and its customer, includes party representations as to certain clearing-related matters, close-out methodologies for cleared OTC swaps, triggers for liquidation, valuation provisions for terminated trades, and provisions governing tax issues.  ISDA Release.  FIA Release.  

Updated Stress Testing Timeline for Large Banks

On August 27, the FDIC, Fed and OCC announced they are considering delaying the implementation timeline until September 2013 for the annual capital-adequacy stress tests required by the Dodd-Frank Act for covered institutions with total consolidated assets between $10 billion and $50 billion. FDIC Release.  Fed Release.  OCC Release.  

CFTC Final Rules for Swap Dealers and Major Swap Participants

On August 27, the CFTC approved final rules to improve the risk management procedures of swap dealers and major swap participants.  The final rules will become effective 60 days after publication in the Federal Register.  CFTC Release.

Fed, FDIC and OCC Final Amendments to Market Risk Capital Rule

On August 30, the Fed, FDIC, and the OCC issued a final rule amending their respective market risk capital rules, which generally apply to banking organizations that engage in substantial trading activity.  The final rule improves sensitivity to risks under the current regulatory measurement methodologies, including default and migration risks associated with illiquid products.  The agencies anticipate that the final rule will significantly increase the risk-based capital allocated to market risk.  The final rule will be effective on January 1, 2013.  OCC Release.  Final Rule.  

SEC Study on Financial Literacy

On August 30, the SEC issued a study, as required by Section 917 of the Dodd-Frank Act, with findings on: (i) the existing level of financial literacy of U.S. retail investors; (ii) methods to improve the timing, content, and format of information disclosed to investors; (iii) the most useful and understandable relevant information needed for investors to make informed financial decisions; (iv) methods to increase transparency of expenses and conflicts of interest in transactions involving investment services and products; (v) the most effective existing private and public efforts to educate investors; and (vi) a strategy to improve financial literacy of investors.  SEC Release.  SEC Study.

SEC Updated EDGAR Filer Manual

On August 30, the SEC issued a final rule adopting revisions to the EDGAR Filer Manual.  The revisions are being made primarily to: (i) support submission of Confidential Registration Statements; (ii) require Form ID authentication documents in PDF format; (iii) automate LTID generation for Large Trader registrations; (iv) support minor updates to Form D; (v) remove superseded XBRL Taxonomies; (vi) remove the OMB expiration date from Form TA-1, TA-2, TA-W, 25-NSE; and (vii) request of unused funds.  SEC Final Rule.   

Rating Agency Developments


On August 30, Fitch issued a release on the potential wide-ranging implications for structured finance transactions by FATCA.  Fitch Release.

On August 28, Moody’s released a report summarizing, by industry sector, the multiples of rent expense that are generally used in global standard adjustments to capitalize leases that companies account for as operating leasesMoody’s Report.

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

Recent Orrick Alerts


New CFTC Regulatory Regime for Private Fund Managers

On April 24, the CFTC repealed the exemption from registration under the U.S. Commodity Exchange Act for private investment funds provided by CFTC Rule 4.13(a)(4).  This Client Alert, written by Ed Eisert and Evelyn Grant, provides an overview of the alternatives available to private fund managers.

RMBS Litigation


Citigroup Settles RMBS Class Action Lawsuit for Nearly $25 Million

On August 27, lead plaintiffs City of Ann Arbor Employees’ Retirement System and Greater Kansas City Laborers Pension Fund submitted an unopposed motion seeking preliminary approval of a settlement of claims against certain Citigroup entities and their officers under Sections 11, 12, and 15 of the Securities Act of 1933.  Plaintiffs originally sued in connection with eighteen RMBS securitizations issued by Citigroup, but the court dismissed the claims as to all but two of those securitizations for lack of standing.  The settlement resolves the claims relating to those remaining two securitizations.  Under the terms of the proposed settlement, $24,975,000 would be distributed among the plaintiff class such that if claims are submitted by all eligible certificate-holders, the average recovery will amount to roughly $13.25 per $1,000 in initial face value of the certificates.  The two sides arrived at this settlement following mediation sessions held before retired U.S. District Judge Layn Phillips.  Motion.  

FHFA and Freedom Trust 2011-12 Sue Deutsche Bank Affiliate for Alleged Fraud

On August 24,  two summonses with notice were filed in New York state court against DB Structured Products, Inc. (DBSP).  Both lawsuits allege that DB breached certain representations and warranties concerning the characteristics of a pool of mortgages which backed the ACE 2006-FM1 securitization (the “Trust”).  The first suit, filed by the Federal Housing Finance Agency as conservator for the Federal Home Loan Mortgage Corporation, seeks to enforce DBSP’s alleged contractual obligation to repurchase loans from the Trust where representations and warranties have been breached.  The FHFA alleges that the representations that were breached relate to compliance with loan underwriting standards, the absence of error or fraud in the origination of a loan, the accuracy of data provided to rating agencies, the practices followed during the servicing of the loans, the absence of high cost loans, and the appraisals of the properties underlying the loans.  The second suit, filed by Freedom Trust 2011-12, an investor purporting to sue on behalf of the Trust, seeks an order demanding the repurchase of the loans, or in the alternative compensatory damages.  Freedom Trust alleges that the representations were breached due the following categories of alleged misstatements: i) the misstatement of a borrower’s existing debt, ii) the misstatement of a borrower’s intention to occupy the property, iii) the misstatement of a borrower’s debt-to-income ratio, iv) the misstatement of a borrower’s income and/or employment, and v) the misstatement that a particular loan’s underwriting process complied with an originator’s stated underwriting guidelines.  FHFA Summons. Freedom Trust Summons.  

HSH Nordbank AG Sues Goldman Sachs and Morgan Stanley Over $634 Million in RMBS

Several HSH Nordbank AG affiliates filed two summonses with notice in New York state court on August 24, seeking damages, rescission and/or a declaratory judgment arising out of their purchase of roughly $524 million and $110 million in RMBS certificates from Morgan Stanley and Goldman Sachs, respectively.  Other than the details relating to the particular defendants, the two summonses with notice are identical.  In particular, in both cases HSH Nordbank alleges that offering materials provided by the Defendants contained material misrepresentations concerning the underwriting standards for the loans underlying the RMBS, the legal validity of the trusts and their entitlement to receive payments on the loans, the loans’ loan-to-value ratios, the percentage of owner-occupied properties, and the credit ratings assigned to the RMBS.  Goldman Sachs Summons. Morgan Stanley Summons.  

Morgan Stanley Sued Over $140 Million in RMBS

On August 29, Bank Hapoalim B.M. filed a summons with notice in New York state court against four Morgan Stanley entities.  Bank Hapoalim alleges that offering materials accompanying the sale of eight RMBS purchased for a total of $140,507,000 between September 2006 and July 2007 contained fraudulent misrepresentations that induced the purchases.  Bank Hapoalim brings claims for violation of the Securities Act, common law fraud, aiding and abetting fraud, negligent misrepresentation, and breach of contract.  In particular, Bank Hapoalim alleges that the defendants made material misrepresentations and omissions concerning the underlying guidelines used to originate the loans, the statistical characteristics of the loans, including loan-to-value ratios, combined loan-to-value ratios, and owner-occupancy status, the legal validity of the trusts and their entitlement to receive payments on the loans, and the credit ratings assigned to the RMBS.  Summons.  

European Financial Industry Developments


ESRB Advises on EMIR

On August 29, the European Systemic Risk Board (ESRB) published advice to the European Securities and Markets Authority (ESMA) on the following two aspects of the draft regulatory technical standards (RTS) to be implemented pursuant to EMIR. Advice 1.  Advice 2

Use of over-the-counter (OTC) derivatives by non-financial counterparties

  • Legislators may wish to ensure that all corporations exposed to derivative activities at a given proportion of their overall balance sheet are treated equally, whatever their size.
  • The total amount of derivatives held by a non-financial corporation, irrespective of their intended use, should be appropriately reflected in the calculation of the clearing threshold.

Eligibility of collateral for central counterparties (CCPs)

  • Type of collateral used - CCPs should only accept securities that are listed and publicly traded.
  • The haircuts to apply to collateral - haircut practices should be designed in a way that minimises sudden and large increases in times of market stress.
  • Conditions under which commercial bank guarantees may be accepted as collateral - commercial bank guarantees should be subject to a limited use and lower concentration ratio than the one applicable to other eligible collateral.

FSA Consultation Paper on the EU Short Selling Regulation

On August 30, the FSA published a consultation paper on the proposed amendments to the FSA Handbook relating to the EU Short Selling Regulation (SSR), which will apply from November 1. CP12/21

The consultation paper proposes the repeal of the UK’s current short selling regime contained in FINMAR 2 and sets out how the UK will implement the SSR in the UK.  Responses should be submitted by September 20.

EU Commission’s “Banking Union” Proposal

On August 31, the EU Commission issued a press release stating that it will publish its proposals for a single banking supervision mechanism in the euro area on September 12. Press Release.

The proposals include:

  • The new supervisory role for the European Central Bank (ECB)
  • The relationship between national supervisors and the ECB
  • Clarifying the role of the European Banking Authority (EBA)

The Commission expects these proposals to be adopted by the end of 2012, in order for the new system to enter into force early in 2013.

FSA to Commence Further Thematic Work on Wealth Management

On August 29, the FSA published a statement saying that it has launched further thematic work into the wealth management sector. Statement

Following a review of a sample of wealth management firms, in June 2011, the FSA wrote “Dear CEO” letters to all Chief Executive Officers of firms that offer wealth management services to retail clients highlighting that the FSA’s work had identified “significant, widespread failings” in the industry.

The FSA will interview key individuals from firms that formed part of its previous work to review the approach firms have taken to remediate problems identified in client portfolios and to assess whether they have taken sufficient steps in identifying and dealing with past detriment that consumers may have suffered.

Following these interviews the FSA will consider whether to take any regulatory action. The FSA will publish its report in 2013.


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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