Month: May 2013

FCA Fines J.P. Morgan Over £3.076M Over Systems and Control Failings

On May 23, the new UK conduct regulator, the Financial Conduct Authority (FCA), fined J.P. Morgan for failings in its wealth management business that persisted for two years until 2012.  Specifically, the bank failed to retain and update information on client objectives and risk tolerance.

The investigation, which originally began under the FSA, found that there had been a serious risk of inappropriate investments being made on behalf of clients, as there had been no systems in place to monitor whether appropriate advice had been given.  However, the investigation was unable to find any actual detriment to clients.

The fine levied reflects a 30% discount for cooperation and early settlement by J.P. Morgan.  FCA Notice.

European Banking Authority Consults on Material Risk Takers for Remuneration Purposes

On May 21, the European Banking Authority (EBA) took into account the results of a 2012 survey and published a consultation on draft regulatory technical standards on criteria identifying categories of staff whose professional activities have a material impact on a financial institution’s risk profile under the proposed CRD IV Directive.  The draft standards are required under Article 90(2) of the proposed Directive and set out an identification process, as well as standard qualitative and quantitative criteria for characterizing material risk takers.

Comments can be made on the consultation paper until August 21, and the draft standards are due for submission to the European Commission by the end of March 2014.  Consultation Paper.

SunTrust Avoids FINRA Arbitration Concerning The Sale of RMBS

On May 16, Judge Naomi Reice Buchwald of the United States District Court for the Southern District of New York granted a permanent injunction against hedge fund Turnberry Capital Management LP (Turnberry) in its attempt to compel a FINRA proceeding against SunTrust Banks Inc. (SunTrust).  Judge Buchwald held that because Turnberry did not purchase the RMBS at issue from SunTrust, it was not a customer of the SunTrust unit that underwrote the securities and therefore could not compel SunTrust to arbitrate.  Turnberry had purchased the securities at issue from the brokerage firm Raymond James & Associates, Inc.  Decision.

District Court Vacates Dismissal, Remands RMBS Suit Against J.P. Morgan to State Court

On May 17, Judge Jed S. Rakoff of the United States District Court for the Southern District of New York vacated his earlier “bottom line” summary judgment decision dismissing Dexia NV/SA’s (Dexia) suit against J.P. Morgan Chase Bank (J.P. Morgan) and its various affiliates.  Dexia alleged fraud, negligent misrepresentation and successor liability claims related to the sale of $774 million in residential mortgage-backed securities.  J.P. Morgan had removed the action from state court claiming federal jurisdiction primarily under the Edge Act as well as under the Court’s bankruptcy jurisdiction.  The Edge Act, a statute enacted in 1919, provides for federal jurisdiction if two conditions are met: (i) an international banking and financial corporation organized under the laws of the United States (an Edge Act corporation) must be a party and (ii) the lawsuit must involve an offshore banking transaction.  Although the Court initially denied plaintiffs’ motion to remand based on the Edge Act, Judge Rakoff vacated that decision based on a recent Second Circuit decision requiring the offshore banking transaction to be engaged in by the Edge Act corporation.  Because J.P. Morgan did not originate the securitized loans or otherwise engage in the foreign banking transactions, the court concluded the Edge Act did not apply, and it could not exercise jurisdiction.  Opinion.

Rating Agency Developments

On May 22, Moody’s released its methodology for rating auto loan­-backed ABSMoody’s Report

On May 20, S&P released its methodology for revising reinvestment interest rates for fixed-rate bonds.  S&P Report

On May 17, Fitch released its amended criteria for rating U.S. federal family education loan program student loan ABSFitch Report

On May 17, Fitch released its state revolving fund and leveraged municipal loan pool criteria.  Fitch Report

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

CFPB’s Escrows Final Rule

On May 16, the CFPB issued a final rule clarifying and making technical amendments to its Escrows Final Rule in January of this year.  The Escrows Final Rule amends an existing rule that provides protections regarding assessments of consumers’ ability to repay and prepayment penalties on certain higher-priced mortgage loans, and the clarifications (i) ensure existing protections remain in place for higher-priced mortgage loans until the expanded provisions take effect in January 2014 and (ii) include guidance for determining whether a county is considered “rural” or “underserved” for the purposes of applying certain exemptions.  CFPB ReleaseCFPB Final Rule.

The AIFMD Developments

HM Treasury Responds to Consultation on Transposing AIFM Directive

On May 13, HM Treasury published its response to its January 2013 consultation on transposing the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFM Directive or AIFMD).  HM Treasury also published a revised draft version of the Alternative Investment Fund Managers Regulations.  The response mainly provides information about HM Treasury’s approach to sub-threshold managers and transitional arrangements.  Response.

FSA Second Consultation Paper on Implementing AIFM Directive: Consultation Period Ends

On May 10, the consultation period ended for the FSA’s second consultation paper on the implementation of the Alternative Investment Funds Managers Directive (2011/61/EU) (AIFM Directive) (CP13/9, also known as CP2).  Final rules will not be published until June, but the Financial Conduct Authority is meant to confirm some of its final policy positions before then to give firms marginally more time to factor these positions into their implementation plans.  The key policy question is whether the FCA will accept AIFM and depositary authorisation or variation applications before July 22.

AIFM Directive Implementing Regulations Published in OJ

On May 16, the texts of two European Commission Implementing Regulations required under the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFM Directive or AIFMD) were published in the Official Journal of the European Union (OJ).  Text OneText Two.

European Commission Requests ESMA Deliver Draft Regulatory Technical Standards on Cross-Border Application of EMIR

On May 13, the European Securities and Markets Authority (ESMA) published a letter (dated April 22, 2013) from Jonathan Faull, European Commission Director General of Internal Market and Services, to Steven Maijoor, ESMA Chair.  The letter relates to the regulatory technical standards which are set out in articles 4(4) and 11(14) of EMIR (the Regulation on OTC derivatives, central counterparties and trade repositories (Regulation 648/2012)).  Articles 4(4) and 11(14) of EMIR deal with the application of EMIR to transactions between non-EU entities with a direct, substantial and foreseeable effect within the EU.

ESMA postponed the development of these technical standards in June, in light of discussions which were ongoing with international regulators on the coordination of the implementation of OTC derivatives market reforms.  The letter requests that ESMA deliver the two draft regulatory technical standards by September 25.  Letter.

European Commission Consults on EU Banking Structural Reforms

On May 16, the European Commission published a consultation paper on reforms to the structure of the EU banking sector, which focuses on policy options for structural separation.  The Commission is seeking views on policy options relating to the scope of banks potentially subject to separation.  The deadline for responses to the consultation is July 3.  Consultation Paper.

UK Prospectus Regulations 2013

On May 14, the UK Prospectus Regulations 2013 and an accompanying explanatory memorandum were published.  These regulations amend sections of the Financial Services and Markets Act 2000 (FSMA) as part of the implementation of the Directive amending the Prospectus Directive and Transparency Directive (2010/73/EU).

The most significant amendment is to section 86(1A) of FSMA, which sets out the circumstances in which a further prospectus is not required in the context of a retail cascade.  Section 86(1A) of FSMA now provides that, in the case of certain non-equity securities issued in a continuous or repeated manner by credit institutions, this condition is satisfied if the securities have not ceased to be issued in a continuous or repeated manner.  The Prospectus Regulations 2013 will come into force on May 31.  Prospectus Regulations 2013Explanatory Memorandum.