Orrick's Financial Industry Week In Review - April 9, 2012

by Orrick, Herrington & Sutcliffe LLP

Orrick Alerts on JOBS Act

Jumpstart Our Business Startups (JOBS) Act

President Obama signed the Jumpstart Our Business Startups Act (the "JOBS Act") into law on April 5.  The following is a collection of the alerts published by Orrick on various aspects of the new law. 

  • JOBS Act – Implications for Issuers and Financial Institutions:  The JOBS Act is intended to stimulate economic growth by improving access to the U.S. capital markets for U.S. and foreign emerging companies.  While certain provisions of the JOBS Act provide added flexibility to such earlier stage companies, its potential impact on the capital raising process remains unclear.  Click here to read more.
  • JOBS Act Eases Restrictions on Rule 144A and Private Offerings – ABS Considerations:  The JOBS Act includes many provisions intended to facilitate capital raising and reduce regulatory burdens for certain types of issuers, but does little for the asset-backed securities market, which continues to grapple with the Dodd-Frank Act and related regulations and the looming specter of Reg AB II.  ABS issuers, underwriters and investors, however, will be interested in the sections of the Act that amend the exempt offering provisions of the Securities Act of 1933 and direct the SEC to revise regulations to permit general solicitation and advertising in connection with offerings that are exempt from registration under the Securities Act.  Click here to read more.
  • JOBS Act – Implications for Sponsors of Venture Capital, Private Equity and Hedge Funds:  The JOBS Act: (i) eliminates the prohibition on "general solicitation" and "general advertising" in connection with the private placement of Private Fund securities, provided the securities are purchased solely by "Accredited Investors;" and (ii) provides a new safe-harbor exemption from broker-dealer registration for persons who take certain actions or perform certain services in connection with such transactions.  Click here to read more.  

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Financial Industry Developments

Fed Policy Statement on Rental of OREOs

On April 5, the Fed released a policy statement on the rental of residential other real estate owned properties (OREOs) to remind banking organizations and examiners that Fed regulations and policies permit rentals as part of an orderly disposition strategy and to outline supervisory expectations for residential rental activities.  Release.  Policy Statement.

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Fed Final Rule to Simplify Reserve Requirements and Reduce Costs

On April 5, the Fed issued a final rule to simplify the administration of reserve requirements and reduce administrative and operational costs for depository institutions and Federal Reserve Banks.  Release.  Reg D Amendment Final Rule.  Reg J Amendment Final Rule.

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FSOC Rule on Oversight of Nonbank Financial Companies

On April 3, the FSOC approved a final rule and interpretive guidance on its authority to require supervision and regulation of certain nonbank financial companies.  Section 113 of the Dodd-Frank Act authorizes the FSOC to require a company to be subject to Fed supervision if the FSOC determines that material financial distress at the company, or the characteristics of the company, could pose a threat to U.S. financial stability.  Treasury Release.  Final Rule.

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Fed Mortgage Consent Order Against Morgan Stanley

On April 3, the Fed announced a Consent Order against Morgan Stanley regarding an alleged pattern of misconduct and negligence in residential mortgage loan servicing and foreclosure processing at its subsidiary, Saxon Mortgage Services, Inc.  The Consent Order requires Morgan Stanley to retain an independent consultant to review foreclosure proceedings by Saxon in 2009 and 2010.  If Morgan Stanley re-enters the mortgage servicing business while the Consent Order is in effect, it will be required to implement servicing and foreclosure practices comparable to what the mortgage servicers subject to the 2011 enforcement actions were required to implement. Fed Release.

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Mortgage Servicing and Foreclosure Consent Judgments Approved

On April 4, U.S. District Court Judge Collyer approved the previously announced consent judgments resolving claims by the DOJ and 49 state AGs against Ally, Bank of America, Citi, JPMorgan and Wells Fargo relating to alleged mortgage servicing and foreclosure practices.  Ally Financial Consent Judgment.  Bank of America Consent Judgment.  Citigroup Consent Judgment.  JP Morgan Consent Judgment.  Wells Fargo Consent Judgment.  

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Fed Request for Comments on "Predominantly Engaged in Financial Activities"

On April 2, the Fed requested comment on a proposed amendment to its February 11 notice of proposed rulemaking to establish requirements for determining whether a company is "predominantly engaged in financial activities".  Based on comments received on the proposal, the amendment is intended to clarify the definition of financial activities for purposes of Title I of the Dodd-Frank Act.  Commenters to the February 11 proposal asked whether conditions imposed under the Bank Holding Company Act and regulations should be considered in defining financial activities under Title 1.  Comments must be submitted by May 25.  Fed Release.  Request for Comment.

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Exemptions for Security-Based Swaps

On March 30, the SEC issued final rules adopting exemptions for certain security-based swaps under the Securities Act (other than the Section 17(a) anti-fraud provisions), the Securities Exchange Act, and the Trust Indenture Act.  Exempt security-based swaps must be issued by certain clearing agencies and satisfy certain conditions.  The final rules are effective April 16.  Final Rules.

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Rating Agency Developments

On April 3, S&P released its methodology for CDOs and pooled TOBs backed by U.S. municipal debtS&P Release.

On April 2, Moody's released its approach to rating securities backed by FFELP student loansMoody's Report.

On April 2, Fitch updated its Ratings Definitions, removing the definition of Individual Rating, and adding Limitations of National ratings.  Fitch Release.

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

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RMBS Litigation

RMBS Investors File $250 Million Derivative Suit Against HSBC

On March 28, 2012, investors in Ace Securities Corp. Home Equity Loan Trust, Series 2006-SL2 commenced a derivative lawsuit, purportedly on behalf of the Trust, against HSBC Bank, as trustee, and DB Structured Products, Inc., an affiliate of Deutsche Bank, the loan originator.  In a summons with notice filed in the Supreme Court of the State of New York, plaintiffs state that they seek $250 million in damages for breach of repurchase obligations, based on alleged misrepresentations about the quality of the loans in the Trust's collateral pool and borrowers' ability to pay.  The causes of action are for breach of contract and specific performance.  Complaint.

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Landesbank Baden-Wüttenberg Files $455 Million RMBS Suit Against Countrywide

On March 29, 2012, German bank Landesbank Baden-Wurttemberg ("LBW") filed a suit against Countrywide Financial Corp. and related entities in the Supreme Court of the State of New York alleging that Countrywide misrepresented the underwriting standards and appraisals for the loans underlying $455 million of RMBS allegedly purchased by LBW in eleven offerings between 2005 and 2007.  LBW further alleges that Countrywide misrepresented information to credit rating agencies resulting in faulty ratings, misrepresented that the issuing trusts possessed good title to the underlying loans, and ignored underwriting deficiencies by other originators whose loans it purchased.  LBW alleges claims for fraud, aiding and abetting fraud, negligent misrepresentation, successor and vicarious liability, and violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.  LBW seeks unspecified money damages and rescission.  Complaint.

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Dexia Sues Merrill Lynch Over $527 Million in RMBS

On March 29, 2012, Dexia filed suit against Merrill Lynch & Co. and related entities in the Supreme Court of the State of New York in connection with $527 million in RMBS it allegedly purchased in fifteen offerings in 2006 and 2007.  Dexia alleges that Merrill Lynch made misrepresentations about and ignored the deficiencies in the underwriting standards and appraisal practices used by the originators of the loans underlying the RMBS, as well as that the credit ratings were inflated due to false information allegedly provided to the ratings agencies by Merrill.  The causes of action alleged are fraud, aiding and abetting fraud, and negligent misrepresentation.  Dexia, which is represented by the same counsel who represent LBW in its suit against Countrywide, seeks unspecified money damages and rescission.  Complaint.

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Federal Court Dismisses Claims Against Bear Stearns Based on RMBS Credit Ratings

On March 30, 2012, Judge Laura Taylor Swain of the U.S. District Court for the Southern District of New York dismissed claims based on credit ratings brought by several retirement and pension funds against Bear Stearns & Co., Inc. and related affiliates in connection with the sale of RMBS pass-through certificates.  Plaintiff brought claims under Section 11, 12(a)(2) and 15 of the Securities Act of 1933.  The court found that plaintiffs failed to plead that the rating agencies disbelieved their ratings, but granted plaintiffs leave to amend to allege Bear Stearns was aware of the inaccuracy of the credit ratings.  The court, however, declined to dismiss claims that Bear Stearns made misrepresentations concerning the quality of the underlying loans in its offering documents.  It also rejected Bear Stearns' argument that plaintiffs lacked standing to sue on tranches they did not purchase.  Decision.

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Ambac Sues JP Morgan Over Insurance of Bear Stearns RMBS

On March 30, 2012, Ambac Assurance Corp. brought claims against J.P. Morgan Chase, EMC Mortgage, and Bear Stearns in the Supreme Court of the State of New York, alleging fraudulent marketing of RMBS by Bear Stearns.  Ambac alleges that Bear Stearns, which was acquired by J.P. Morgan, misrepresented the quality of the underlying mortgage loans when obtaining insurance from Ambac on the RMBS.  Ambac, which alleges losses of $200 million, brings claims for fraudulent inducement, breach of contract, and successor liability.  Complaint.

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Federal Court Dismisses Claims Against Bank of New York Mellon

On April 3, 2012, Judge William H. Pauley of the U.S. District Court for the Southern District of New York dismissed with prejudice nearly all claims against Bank of New York Mellon, as trustee, by four plaintiff pension funds in a putative class action relating to 530 Countrywide RMBS trusts worth $424 billion.  Plaintiffs allege that Bank of New York Mellon violated the Trust Indenture Act and breached its contractual and fiduciary duties by failing to remedy the allegedly inadequate servicing of the mortgages underlying the trusts.  The court found the plaintiffs lacked standing to bring claims under the Trustee Indenture Act relating to trusts in which they did not actually invest.  As a result of the decision, only 26 trusts worth $30 billion remain in the litigation.  Decision.  

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European Financial Industry Developments

FSA Fines Ian Hannam Chairman of Capital Markets at JPMorgan Cazenove for Market Abuse

On 3 April 2012 the FSA published a Decision Notice stating that the FSA had decided to fine Ian Hannam £450,000 for two instances of market abuse (improper disclosure).  In the FSA's opinion, Hannam disclosed inside information in two emails sent in September and October 2008 to a prospective client considering buying a stake in Heritage Oil Plc (Heritage), an existing J P Morgan client for which Hannam was the lead adviser.  The September email contained information about a potential offer for Heritage and the October email contained information about a new oil find by Heritage.

The Decision Notice states that the FSA accepts that Hannam did not set out to commit market abuse but considers that Hannam's failings were serious in view of his experience and senior position within J P Morgan.  Mr. Hannam has resigned his position as Chairman of J P Morgan in order to appeal the matter to the Upper Tribunal.


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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