Month: June 2011

New York Federal Court Transfers Countrywide RMBS Case to California to Prevent “Judge-Shopping”

On June 14, 2011, District Judge Alvin Hellerstein of the S.D.N.Y. granted defendant Countrywide’s motion to transfer this case to the U.S. District Court for the Central District of California. Allstate’s complaint alleges that Countrywide, several associated entities, and certain high-ranking employees committed fraud in connection with statements regarding underwriting standards in the sale of over $700 million in RMBS. Judge Hellerstein noted that this case is closely related to another case in the Central District of California involving the same parties and the same issues, and that Allstate filed its New York case only after the California judge narrowed the case to exclude some of the securities upon which Allstate bases its claims. Judge Hellerstein further found that the New York suit “gives the appearance of judge-shopping” and granted the motion to “promote the efficient use of judicial resources” and “prevent the possibility of inconsistent results.” Decision.

SEC Proposed Amendments to Broker-Dealer Financial Reporting Rule

On June 15, the SEC proposed several amendments to Rule 17a-5. The first set of amendments would: (i) require a broker-dealer acting as a custodian to undergo examination by a registered public accounting firm to ensure compliance with custody Rule 17a-5; (ii) facilitate the ability of the PCAOB to implement oversight of independent public accountants of broker-dealers pursuant to Section 982 of the Dodd-Frank Act; and (iii) eliminate redundant requirements for broker-dealers affiliated with, or dually-registered as, investment advisers. The second set of amendments would require a broker-dealer that clears transactions or carries customer accounts to allow the SEC and designated examining authorities (DEAs) to have access to the independent public accountant that audits such broker-dealer to discuss their audit findings and to review related audit documentation. The third set of amendments would require a broker-dealer to file a new Form Custody, providing the SEC and DEAs increased oversight over the broker-dealer’s custody practices. Comments must be submitted within 60 days of publication in the Federal Register. SEC Release. Proposed Amendments.

Supreme Court Decision Janus Capital Group, Inc., et al. v. First Derivative Traders

On June 13, the Supreme Court issued a decision in favor of Janus Capital Group, Inc. (JCG) and Janus Capital Management LLC (JCM) in Janus Capital Group, Inc., et al. v. First Derivative Traders, a Rule 10b-5 private action brought by First Derivative Traders against JCG and its wholly owned subsidiary JCM. First Derivative Traders alleged that JCG and JCM were liable for material false statements in mutual fund prospectuses filed by Janus Investment Fund, a mutual fund for which JCM acted as the investment adviser. The Court held that for purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement. The Court found that Janus Investment Fund was a separate legal entity owned entirely by mutual fund investors and only one member of Janus Investment Fund’s board of trustees was associated with JCM and, accordingly, JCG and JCM did not have ultimate authority over the statements in question and were not liable under Rule 10b-5. The Court declined to reapportion this Rule 10b-5 liability despite the close relationship between investment advisers and the mutual funds they advise, stating that any such reallocation was the responsibility of Congress. SCOTUS Opinion.

Rating Agency Developments

On June 17, Fitch withdrew its criteria for rating RMBS in emerging markets – EMEA. Fitch Release.

On June 14, DBRS released its master European granular corporate securitization (SME CLO) methodology. DBRS Release.

On June 13, Moody’s published a special report on its approach to analyzing legal risks for Dutch bank mortgages in securitizations and covered bond transactions. Moody’s Release.

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

Fed Increases Reg Z and Reg M Dollar Thresholds

On June 13, the Fed amended Regulation Z, which implements the Truth in Lending Act, and Regulation M, which implements the Consumer Leasing Act, by increasing the dollar threshold for exempt consumer credit and lease transactions under both regulations from $50,000 to $51,800. These adjustments will be effective on January 1, 2012. Fed Release. Regulation Z Amendment. Regulation M Amendment.

Fed Adjusts Fee-Based Trigger for Additional Mortgage Loan Disclosures

On June 13, the Fed published its annual adjustment to the amount of fees triggering additional disclosure requirements under the Truth in Lending Act and HOEPA for home mortgage loans with rates or fees above a certain amount. The dollar amount of the trigger has been adjusted to $611, and will be effective starting on January 1, 2012. The adjustment does not affect rules for “higher-priced mortgage loans” adopted by the Fed in July 2008. Fed Release. Fed Rule.

CFTC Extension of Effective Date of Title VII of the Dodd-Frank Act

On June 14, the CFTC extended the general effective date of Title VII of the Dodd-Frank Act beyond July 16. For provisions of Title VII that reference the terms “swap“, “swap dealer“, “major swap participant“, or “eligible contract participant“, which the Dodd-Frank Act requires the CFTC to further define, persons or entities will be exempt from compliance with such provisions until the earlier of: (i) the effective date of definitional rulemaking for such terms; or (ii) December 31. For those provisions that will apply to certain transactions in exempt or excluded commodities as a result of the repeal of various exemptions and exclusions under the CEA as of July 16, the CFTC will temporarily exempt such transactions until the earlier of: (i) the repeal or replacement of applicable CFTC regulations; or (ii) December 31. CFTC Webcast of Open Meeting. CFTC Fact Sheet.

Fed Proposed Amendment to Reg Y

On June 10, pursuant to Section 165 of the Dodd-Frank Act, the Fed proposed to amend Regulation Y, requiring U.S. bank holding companies with total consolidated assets of $50 billion or more to submit capital plans on an annual basis and to provide prior notice under certain circumstances before making a capital distribution. Comments must be submitted by August 5. Fed Release. Proposed Amendment.

Final Rule to Establish a Risk-Based Capital Floor

On June 14, the Fed, FDIC and OCC, consistent with Section 171 of the Dodd-Frank Act, adopted a final rule establishing a floor for the risk-based capital requirements applicable to the largest, internationally active banking organizations. The final rule will be effective 30 days after publication in the Federal Register. FDIC Release.