Orrick's Financial Industry Week in Review
May 2, 2011

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Financial Industry Developments

·         SEC Proposed Rule Amendments to Remove Rating References

·         GSE Alignment of Guidelines for Servicing Delinquent Mortgages

·         CFTC Proposed Rules on Capital Requirements for Swap Dealers and Major Swap Participants

·         CFTC and SEC Proposed Rules and Guidance for Swap Definitions

·         Treasury Notice of Proposed Determination on Foreign Exchange Swaps and Forwards

·         CFTC Proposed Rule on Protection of Cleared Swaps Customer Contracts and Collateral

·         CFTC Proposed Rules to Adapt CFTC Regulations to New Commodity Exchange Act Definitions

·         Rating Agency Developments

Asset Management

·         CFTC and SEC Proposed Rules and Guidance for Swap Definitions

·         CFTC Proposed Rules on Capital Requirements for Swap Dealers and Major Swap Participants

RMBS Litigation

·         Federal Home Loan Bank of Boston Files RMBS Suit

·         Federal Judge Grants Motion to Dismiss Claims Against Bank of America as Successor to Countrywide

·         Bank of America and Countrywide Sued By Purchasers of $619 Million in RMBS

Events
Dodd-Frank and the Rising Tide of Shareholder Empowerment
May 11, 2011
The program will cover a host of key developments from a litigation, regulatory and counseling perspective.

Life Settlements Breakfast Briefing
May 26, 2011
Orrick and Maple Life Financial will be discussing the recent 
developments in the life settlement market and how the changes are affecting business.

Editorial Board
Howard Altarescu
Matt Craner
Edward Eisert
Steve Fink
Brad Carso
Joshua Cutler
Amie Davis
Njoki Gatimu
Ben Geiger
Jesse Infeld
Kara Moskowitz
Rhanda Moussa
Mark Racic

Financial Industry Developments

 

SEC Proposed Rule Amendments to Remove Rating References

On April 27, pursuant to Section 939E of the Dodd-Frank Act, the SEC proposed amendments to remove references to credit ratings in various Exchange Act rules.  Comments must be submitted within 60 days after publication in the Federal Register.  SEC Release.  SEC Proposed Rule. 

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GSE Alignment of Guidelines for Servicing Delinquent Mortgages

On April 28, the FHFA directed Fannie Mae and Freddie Mac to align their guidelines for servicing delinquent mortgages that they own or guarantee in four key areas: (i) borrower contact; (ii) delinquency management practices; (iii) loan modifications and foreclosure alternatives; and (iv) foreclosure timelines.  The updated guidelines will also establish monetary incentives and penalties for servicer performance.  FHFA Release. 

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CFTC Proposed Rules on Capital Requirements for Swap Dealers and Major Swap Participants

On April 27, pursuant to Section 731 of the Dodd-Frank Act, the CFTC proposed rules that would mandate capital requirements for swap dealers and major swap participants that are not subject to prudential regulation by the Fed, OCC, FDIC, FCA, or FHFA.  Capital requirements would be adjusted depending on whether a swap dealer or major swap participant is a futures commissions merchant, a nonbank subsidiary of a U.S. bank holding company, or neither of the foregoing.  CFTC Fact Sheet.

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CFTC and SEC Proposed Rules and Guidance for Swap Definitions

On April 27, pursuant to Sections 712 and 721 of the Dodd-Frank Act, the CFTC and SEC issued proposed rules that would further define the terms swap, security-based swap, and security-based swap agreement.  The proposed rules also would adopt regulations regarding mixed swaps as well as books and records for security-based swap agreements.  During the April 27 Open Meeting in which the CFTC approved the proposed rules, the Commissioners observed four different approaches between the SEC and CFTC: (i) the inclusion of anti-evasion provisions in the proposed rules; (ii) the treatment of insurance on swaps as a securities-based swap; (iii) treatment of swaps linked to futures for foreign sovereign debt securities; and (iv) the jurisdiction and applicable regulatory requirements of the CFTC over indexed credit default swaps.  Comments must be submitted within 60 days after publication in the Federal Register.  SEC Release. CFTC Fact Sheet.  CFTC Open Meeting Webcast.

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Treasury Notice of Proposed Determination on Foreign Exchange Swaps and Forwards

On April 29, Treasury issued a notice of proposed determination exempting foreign exchange swaps and forwards from the definition of "swap" under the Commodities Exchange Act.  The proposed determination does not extend to other foreign exchange derivatives including foreign exchange options, currency swaps, and non-deliverable forwards.  Foreign exchange swaps and forwards will remain subject to the Dodd-Frank Act's trade reporting requirements and business standards.   Comments must be submitted within 30 days after publication in the Federal Register.  Treasury Fact Sheet.  Proposed Determination.

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CFTC Proposed Rule on Protection of Cleared Swaps Customer Contracts and Collateral

On April 27, pursuant to Section 724(a) of the Dodd-Frank Act, the CFTC proposed rules concerning the protection of cleared swaps and associated collateral of futures commission merchants (FCM) customers.  Among other items, the rules: (i) parallel the regulations governing the account in which FCMs currently hold futures customer collateral pre-bankruptcy and (ii) contain analysis of the costs and benefits of the four models of protection being considered, as described in the ANPR issued by the CFTC on November 19, 2010.  CFTC Fact Sheet.  CFTC ANPR.  CFTC Proposed Rule. 

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CFTC Proposed Rules to Adapt CFTC Regulations to New Commodity Exchange Act Definitions

On April 27, in accordance with Sections 721 and 733 of the Dodd-Frank Act, the CFTC proposed rules to revise its regulations to reflect: (i) amendments to the definitions of "futures commission merchant" and "introducing broker" in the Commodity Exchange Act and (ii) the creation of swap execution facilities as trading platforms for swaps.  CFTC Fact Sheet.  CFTC Proposed Rule.

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Rating Agency Developments

 

On April 28, DRBS updated its methodologies for oil and gas companies and for project financeDBRS Methodologies. 

On April 27, Fitch released its updated criteria for rating general obligation transactions of state housing finance agenciesFitch Release.  Fitch Report.

On April 25, Fitch released is updated criteria for rating airport operating lease ABSFitch Release. 

On April 25, Fitch released its updated report on U.S. municipal structured finance rating criteria.  Fitch Release.  Fitch Report.   

Note: Free registration is required for Fitch releases and reports.

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Asset Management

 

CFTC and SEC Proposed Rules and Guidance for Swap Definitions

In addition to their effect on the financial industry as a whole, the proposed definitions under Title VII under the Dodd-Frank Act will specifically impact asset managers.  Please see item above.

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CFTC Proposed Rules on Capital Requirements for Swap Dealers and Major Swap Participants

Under the CFTC proposed rules, asset managers would face capital requirements for swap dealers or major swap participants that are not futures commissions merchants and are not nonbank subsidiaries of U.S. bank holding companies.  Please see item above.

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RMBS Litigation

 

Federal Home Loan Bank of Boston Files RMBS Suit

On April 20, 2011, the Federal Home Loan Bank of Boston ("FHLB Boston") filed suit against over eighty defendants in Massachusetts state court.  FHLB Boston alleges that various underwriters, depositors, individual defendants, and rating agencies made misstatements and omissions in the sale of mortgage-backed securities.  The alleged misstatements and omissions include those about the originating banks' adherence to their stated underwriting guidelines, appraisals, credit ratings, compliance with predatory lending restrictions, and the enforceability of the underlying mortgages.  FHLB Boston joins several other Federal Home Loan Banks that already have filed suit in courts throughout the United States over their purchases of mortgage-backed securities, including the Federal Home Loan Banks of Atlanta, Chicago, Indianapolis, Pittsburgh, San Francisco, and Seattle.  Complaint.

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Federal Judge Grants Motion to Dismiss Claims Against Bank of America as Successor to Countrywide

On April 20, 2011, Judge Mariana Pfaelzer of the U.S. District Court for the Central District of California granted Bank of America's motion to dismiss the claims against it in a putative class action complaint that sought to hold Bank of America liable for Countrywide's alleged misstatements and omissions regarding Countrywide's loan origination practices.  Plaintiffs argued that Bank of America can be held liable as a successor to Countrywide's liability because the asset transfer between Bank of America and its subsidiary Countrywide constituted a de facto merger.  Judge Pfaelzer disagreed; in applying Delaware law, Judge Pfaelzer noted that "Delaware courts use the doctrine of de facto merger sparingly" and declined to apply the doctrine here.  Notably, Judge Pfaelzer's decision runs contrary to an April 2010 decision by New York Supreme Court Justice Eileen Bransten which held, under New York law, that the asset transfer did constitute a de facto merger and that Bank of America could be liable as a successor to Countrywide.  Pfaelzer Decision.  Bransten Decision.

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Bank of America and Countrywide Sued By Purchasers of $619 Million in RMBS

On April 27, 2011, a group of insurers owned by Western & Southern Financial Group filed a lawsuit in the United States District Court for the Southern District of Ohio against Countrywide, various former Countrywide officers, and Bank of America, as successor to Countrywide, in connection with the sale of RMBS between 2005 and 2007.  The plaintiffs allege that the Countrywide defendants were responsible for misrepresentations and omissions in offering materials, pursuant to which plaintiffs purchased approximately $619 million in RMBS.  Plaintiffs allege misrepresentation and omissions regarding Countrywide's underwriting guidelines, owner-occupancy status, appraisals, and exceptions to low-documentation loan procedures.  Plaintiffs assert federal law claims for violations of Sections 11, 12(a)(2), and 15 of the '33 Act, and Sections 10(b) and 20(a) of the '34 Act.  They also assert state law claims for negligent misrepresentation, fraud, aiding and abetting fraud, and various violations of the Ohio Securities Act.  Complaint.

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