Month: May 2012

Rating Agency Developments

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On May 24, S&P updated its methodology for applying its RMBS small pool adjustment factor. S&P Report.

On May 23, Moody’s updated its methodology for ABCP. Moody’s Report.

On May 23, Fitch updated its criteria for multilateral development banks. Fitch Report.

On May 22, Fitch detailed its rating considerations for passive funds. Fitch Report.

On May 22, DBRS released its master U.S. ABS surveillance methodology. DBRS Report .

On May 22, DBRS released its unified interest rate model for U.S. timeshare loan ABS transactions.  DBRS Report.

On May 22, DBRS released its operational risk assessment for U.S. ABS servicers. DBRS Report.

On May 22, DBRS released its methodology for U.S. timeshare loan securitizations. DBRS Report.

On May 21, Fitch published criteria for state revolving funds (SRFs) and leveraged municipal loan pools (MLPs). Fitch Report.

On May 18, S&P updated its base-case default rate assumptions and benchmark pool for Japanese credit card and consumer loan securitizations. S&P Report.

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FINRA Fines Citigroup $35 Million for Violation of FINRA and SEC Rules

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On May 22, 2012, the Financial Industry Regulatory Authority (“FINRA”) fined Citigroup $35 million for alleged rule violations, including providing investors with inaccurate information in connection with several RMBS offerings. Citigroup consented to the $35 million fine, but neither admitted nor denied FINRA’s findings. FINRA found that between January of 2006 and October of 2007, Citigroup posted inaccurate performance data and static pool information on its website after receiving information indicating that the data was incorrect. The agency further found that the errors in the information were significant enough potentially to have affected prospective investors’ assessments of six subprime and Alt-A RMBS offerings. Additionally, the organization found that Citigroup failed to maintain required books and records and failed to supervise the pricing of certain CDO securities, violating, among other things, SEC Rules 17(a)-3(a)(8) and 17a-4.  AWC Letter.

Court Dismisses in Part AIG’s Claims Against Bank of America and Countrywide

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On May 23, 2012, Judge Mariana R. Pfaelzer of the Central District of California dismissed with prejudice the majority of claims brought by AIG in a suit against Bank of America and Countrywide over the sale of RMBS certificates. Judge Pfaelzer held that because AIG purchased the securities at issue more than three years before filing suit, its federal securities claims were time-barred under the three-year statute of repose for claims under the Securities Act of 1933. Judge Pfaelzer determined that a majority of AIG’s common law claims, including negligent misrepresentation and fraud, were also time-barred under the relevant states’ statutes of limitation. The court found that certain additional common law claims were part of a tolling agreement that tolled claims between January 13, 2011 and August 5, 2011, and were thus timely. Order.

Foreign Investors Bring $1.8 Billion RMBS Lawsuit Against Six Investment Banks

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On May 22, 2012, Blue Heron Funding Ltd., Phoenix Light SF Limited, Silver Elms CDO PLC, and Kleros Preferred Funding V PLC filed a summons with notice in the New York State Court against six investment banks and their related entities over $1.8 billion in RMBS certificates originally issued between 2005 and 2007. The plaintiffs, which are incorporated in either the Cayman Islands or Ireland, alleged that the offering materials issued by the defendant banks in connection with their respective RMBS offerings contained material misstatements and omissions regarding the underwriting and appraisal standards used in connection with the underlying mortgage loans, the statistical characteristics of those loans, and the credit ratings of the securities. The plaintiffs assert claims under Sections 11, 12 and 15 of the Securities Act of 1933 and seek to recover a combined total of $1.8 billion, plus legal fees, interest, and punitive damages. Summons.

FDIC Brings Two RMBS Lawsuits Against Several Investment Banks and Related Entities

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On May 18, 2012, the FDIC, in its capacity as receiver for two failed banks, filed two actions in the Southern District of New York arising out of the banks’ alleged purchase of RMBS. In the first suit, the FDIC asserts claims on behalf of Citizens National Bank and Strategic Capital Bank that arise out of the banks’ investment in ten RMBS certificates worth $140.5 million issued and/or underwritten by the defendants, including Bear Stearns, Citigroup, Credit Suisse, Merrill Lynch, and Deutsche Bank. Complaint.  In the second suit, the FDIC asserts claims on behalf of Strategic Capital Bank arising out of the bank’s investment in five RMBS certificates worth $31 million underwritten by JP Morgan, Citigroup, Bank of America, and Deustche Bank. Complaint.  In both suits, the FDIC alleged that the defendant banks violated Sections 11 and 15 of the Securities Act of 1933 by making material misstatements and omissions in the certificates’ registration statements regarding, among other things, the loan to value ratios of the mortgages underlying the certificates, the appraisal standards used in connection with the appraisals of the underlying properties, whether the borrowers intended to occupy the properties as their primary residences, and whether the originators complied with their underwriting guidelines when originating the underlying mortgages. The FDIC seeks a combined total of $77 million in damages, plus attorneys’ fees and costs.

Council of the EU Mandatory Rotation Rule for Credit Rating Agencies

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On May 21, the Council of the European Union agreed on a draft proposal that would introduce a mandatory rotation rule requiring issuers who pay credit rating agencies to rate their structured finance products with underlying resecuritized assets to switch to a different credit rating agency every four years. The proposal would also require issuers to engage at least two different credit rating agencies to rate structured finance products. The mandatory rotation would not apply for structured finance products rated by small credit rating agencies, or to issuers employing at least four credit rating agencies each rating over 10% of the total number of outstanding rated structured finance products.  EU Release. 

ECOFIN Reaches Agreement on CRD IV

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On 15 May 2012, the Council of the EU announced that the Economic and Financial Affairs Council (“ECOFIN”) has reached agreement on the CRD IV proposals. CRD IV is a package of EU reforms on prudential requirements for credit institutions and investment firms intending address a number of issues arising from the financial crisis. The existing Capital Requirements Directive will be replaced with the CRD IV Directive and the Capital Requirements Regulation. The amendments agreed by ECOFIN were published on 17 May 2012 and are available here.

FSA Guidance on the Practice of PFOF

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On 14 May 2012, the FSA published guidance on payment for order flow (“PFOF”) arrangements. These are arrangements where a broker receives payment from market makers in exchange for sending order flow to them. Firms should manage conflicts of interests and tell customers about the PFOF arrangements and put relevant procedures in place to make sure that payments led to better service. Orrick’s Client Alert. Finalised Guidance.

FSA Issues Decision Notice Against Former BGC Senior Executive

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On 16 May 2012 the FSA published a decision notice which it has issued to Anthony Verrier, a former senior executive at BGC Brokers LP. The FSA decided to prohibit Mr. Verrier from performing any function relating to any regulated activity. It considered that Mr. Verrier was not a fit and proper person due to concerns over his honesty, integrity and reputation. Decision Notice.