SEC Proposal to Prohibit Material Conflicts of Interest in Securitization – Advancing Legislative Intent Without Constraining Legitimate Risk Mitigation

SAVE THE DATE: On October 7th in our New York office, Orrick partners will review the SEC’s proposed regulatory framework to prohibit certain conflicts of interest and assess whether the SEC effectively differentiates between legitimate risk mitigation and deceptive practices. We will also consider alternative approaches to manage these conflicts.

Bank of America Shareholder Files Suit Alleging Lack of Due Diligence in RMBS Offerings

On September 19, 2011, a Bank of America shareholder (a profit sharing plan) filed suit in New York Supreme Court against the Bank and certain present and former directors and officers. The suit alleges that Bank of America, while acquiring and securitizing large volumes of mortgage loans, failed to conduct due diligence adequate to ensure the accuracy of the RMBS offering documents. The complaint further alleges that Bank of America included in the securities pools a significant number of mortgages recommended for omission by third-party due diligence providers that Bank of America had retained. Plaintiff seeks unspecified damages for losses in stock value, but the complaint does not cite specific legal causes of action. Complaint.

SEC’s Office Of The Whistleblower Begins Processing Tips: What Companies Should Do Now

Sean McKessy, Chief of the SEC’s Office of the Whistleblower, and Mark Cahn, General Counsel for the SEC, recently outlined the Office of the Whistleblower’s activities and priorities in public remarks. For more information, click here.

Rating Agency Developments

On September 19, in connection with Rule 17g-7, Fitch published a report describing the representations, warranties and enforcement mechanisms that it typically sees in structured finance transactions. Fitch Release. Fitch Report.

On September 22, Fitch updated its master criteria report covering the global insurance industry. Fitch Release.

On September 19, Moody’s published its approach to rating vacation timeshare loan securitizations. Moody’s Release.

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

CFTC Temporary Relief for Large Trader Physical Commodity Swap Reporting

On September 16, the CFTC provided temporary relief from regulations mandating large trader reporting of physical commodity swaps, the effective date of which was September 20. Reflief is provided from reporting, as long as parties make a good faith attempt to comply with the reporting requirements, until November 12 for cleared swaps and January 20, 2012 for uncleared swaps. CFTC Release. CFTC Final Rule.

SEC Rule on Conflicts of Interest in ABS Transactions

On September 19, the SEC issued proposed Rule 127B, as required under Section 621of the Dodd-Frank Act, to prohibit material conflicts of interest in connection with ABS transactions. Under the proposed rule, entities that package and sell ABS would be prohibited from engaging in transactions that would involve or result in a material conflict of interest with respect to any investor in the ABS. The prohibition would end one year after the first closing date of the ABS sale. Comments to the proposed rule must be submitted by December 19. SEC Release. Proposed Rule.

Leave to Appeal in Lehman

On September 20, the United States District Court for the Southern District of New York granted BNY Corporate Trustee Services Limited leave to appeal the bankruptcy court’s decision in the Lehman “Dante” matter. In its January decision, the bankruptcy court had voided certain document provisions providing for the subordination of a swap counterparty’s rights to an early termination payment when the swap counterparty or one of its close affiliates went into bankruptcy. Court Decision.

To view Orrick’s Client Memo on the January Dante decision, click here.

District Court Judge Narrows Morgan Stanley MBS Suit

On September 15, 2011, Southern District of New York Judge Laura Taylor Swain granted in part Morgan Stanley’s motion to dismiss claims in a putative class action by MBS investors that Morgan Stanley violated Sections 11, 12, and 15 of the Securities Act of 1933. Plaintiffs allege that Morgan Stanley made material misrepresentations regarding its ratings and the appraisals and underwriting standards of the underlying mortgages in the marketing and sale of the MBS. Judge Swain found that Plaintiffs failed to sufficiently allege any facts supporting any misrepresentation regarding the derivation or integrity of the MBS ratings or that Morgan Stanley had a duty to disclose any alleged underlying flaws in the ratings process. Judge Swain found that Plaintiffs’ allegations regarding the appraisals and underwriting standards were sufficient and denied the motion to dismiss with respect to those claims. Decision.

Federal Judge Denies Countrywide’s Motion to Dismiss On Three Offerings in MBS Litigation

On September 13, 2011, Central District of California Judge Mariana Pfaelzer denied Countrywide’s motion to dismiss claims in a putative class action complaint arising out of Countrywide RMBS offerings that Countrywide violated Sections 11, 12, and 15 of the Securities Act of 1933. Countrywide argued that Plaintiffs purchased the MBS for three of the nine contested offerings before Countrywide issued its prospectus supplements, thus making it impossible for Plaintiffs to have relied on the alleged misstatements contained in those prospectus supplements. Judge Pfaelzer found that there were too many unknown facts regarding the circumstances of Plaintiffs’ purchases to dismiss these claims, including the possibility that Plaintiffs reviewed drafts of the prospectus supplements. Decision.