FSA Letter on Monitoring Ongoing Appropriateness of Solvency II Internal Models

On 18 June 2012 the FSA published a letter (dated 13 June 2012) from Julian Adams, FSA Director of Insurance, to firms involved in the FSA’s internal model approval process (IMAP) in preparation for the implementation of the Solvency II Directive. Letter.

The letter sets out the FSA’s thinking on how it will monitor the ongoing appropriateness of internal models after approval. Highlights include:

• The FSA expects firms to have systems and controls in place to ensure that the internal model operates properly on a continuous basis at all times, including stressed market conditions.

• The FSA is developing a number of early warning indicators (which may take the form of ratios or ranges) to help it and firms ensure that, after approval, internal models and the solvency capital requirement (SCR) calculation remain appropriate.

FSA Annual Report for 2011/12 Published

On 19 June 2012, the FSA published its Annual Report for 2011/12. The report is a key component of the FSA’s accountability framework. The report deals the performance of the FSA during 2011/12 and compares this against the priorities listed in its business plan. FSA Annual Report.

This will be the FSA’s last annual report before the Prudential Regulation Authority and the Financial Conduct Authority take over as ‘twin peak’ regulators in early 2013.

The FSA measures market cleanliness by looking at the level of abnormal price movements prior to company announcements. This declined from 21.2% in 2010 to 19.8% in 2011. The 2011 level is the lowest since 2003.

Blue Index Trio Sentenced for Insider Dealing

On 20 June 2012, the FSA announced that three individuals with links to Blue Index Ltd, a contract for difference brokerage, had been sentenced for insider dealing. James Sanders, a director of Blue Index, was sentenced to four years in custody and disqualified as a director for five years. This is the longest sentence imposed for insider dealing in recent years. FSA Press Release.

Miranda Sanders, James Sanders’ wife, was sentenced to ten months in custody. This is evidence of the UK’s tough stance on insider dealing and shows that spouses who actively participate in insider dealer cannot expect leniency even if they have young children.

James Swallow, another director of Blue Index, was also sentenced to ten months in custody. The U.S. Department of Justice and the SEC worked alongside the FSA to ensure a successful joined up investigation.

Syncora Permitted to Prove its Breach Claims Without Showing That Alleged Breaches Caused Loans to Default

On June 19, 2012, Judge Paul Crotty of the Southern District of New York granted in part Syncora Guarantee Inc.’s motion for partial summary judgment concerning the showing necessary to prove its claims for breach against EMC Mortgage Corporation. Syncora’s claims arise out of allegedly false representations and warranties concerning the quality of loans underlying $666 million in RMBS that Syncora insured. Without addressing the merits of Syncora’s claims, Judge Crotty ruled that Syncora does not need to prove that the alleged breaches caused any of the alleged defaults that occurred in the loans underlying the RMBS in order to prevail on its claim. Instead, proof that there had been a material breach would be sufficient to entitle Syncora to invoke its repurchase remedy under the parties’ agreement. Similarly, Judge Crotty ruled that Syncora could prove materiality by demonstrating that the breach increased Syncora’s risk of loss, and also ruled that Syncora did not need to prove that the breach caused a loan to default in order to prove materiality. The court held that inaccurate and incomplete information impacts an insurer’s decision whether to issue a policy and at what price and thus adversely affects the insurer’s interest as a matter of law. The court also denied Syncora’s request for a ruling that the court has the power in equity to award relief equivalent to rescission, which the court found would have required factual determinations for which there is no support in the record at this time. Order.

Sixth Circuit Affirms Dismissal of RMBS Case Against Bear Stearns

On June 20, 2012, the Sixth Circuit affirmed an order by the Western District of Kentucky granting Bear Stearns’s motion to dismiss claims brought against it by Republic Bank & Trust Co. arising out of Republic Bank’s purchase of $52 million in RMBS. The Sixth Circuit’s ruling largely rested on Republic Bank’s failure to plead its claims with the required particularity. Specifically, the court found that allegations that prudent loan underwriting standards had not been followed and that property valuations were inaccurate were too general and not sufficiently tied to the loans backing the particular securities Republic Bank purchased. The court also found that many of the facts that Republic Bank alleged to have been misrepresented were in fact disclosed in the offering documents for the securities. Republic Bank admitted it had not read the offering documents prior to its purchases, conduct the court criticized as in dereliction of Republic Bank’s duty to exercise ordinary diligence. Opinion.

SEC Approves New FINRA Communications Rules

On June 14, the SEC approved the adoption by FINRA of final rules governing member firms’ communications with the public. The final rules include general contact standards, such as requiring communications to provide a sound basis for evaluating the facts with respect to a security, as well as content standards that apply to specific issues or securities. The final rules will be effective on February 4, 2013. FINRA Notice.   FINRA Rules.

Rating Agency Developments

On June 20, Fitch updated its criteria for letter of credit-supported bonds. Fitch Report.

On June 20, DBRS released its criteria for market-linked securities. DBRS Report.

On June 20, DBRS released its criteria for representations, warranties, covenants, and events of default in trust indentures. DBRS Report.

On June 20, DBRS released its criteria for guarantees and other forms of explicit support. DBRS Report.

On June 20, DBRS released its criteria for Canadian bankruptcy and restructuring legal considerations. DBRS Report.

On June 20, Fitch updated its availability-based infrastructure project rating criteria. Fitch Report.

Note: Free registration is required for rating agency releases and reports.

SEC Rule for Listing Standards for Compensation Committees and Advisers

On June 20, the SEC approved a rule that directs national securities exchanges to adopt listing standards for public company boards and compensation advisers. The new rule, required by the Dodd-Frank Act, requires exchange listing standards to address: (i) the independence of members on a committee; (ii) the committee’s authority to retain compensation advisers; (iii) the committee’s consideration of the independence of any compensation advisers; and (iv) the committee’s responsibility for the appointment, compensation, and oversight of the work of any compensation adviser. These changes will take effect 30 days after publication in the Federal Register. No later than 90 days after effectiveness, each exchange that lists equity securities must propose listing standards that comply with the new rule. The new listing standards must be approved by the SEC within one year of the new rule becoming effective. SEC Release.  Rule.

LSTA and ABA Provide Comments to Proposed Leveraged Lending Guidelines

On March 30, the Fed, OCC and FDIC issued Proposed Guidance on Leveraged Lending. On June 8, 2012, the LSTA, together with the American Bankers Association (ABA), responded with comments to such guidelines. The comments suggested that more modest changes to the current leveraged finance guidance would allow banks to continue to safely manage the risks of leveraged finance without imposing undue burdens. Generally, the comments noted the costs of implementing the guidelines in comparison to the potential benefits and emphasized that the guidelines are only recommendations that need to remain flexible enough for implementation by a variety of lending institutions across the broad spectrum of leveraged lending transactions. Proposed Guidance. LSTA and ABA Comments.