Industry Developments

SEC Adopts Jobs Act Amendments

 

On April 5, the Securities and Exchange Commission (“SEC“) announced that it has adopted amendments to increase the amount of money companies can raise through crowdfunding to adjust for inflation. It also approved amendments that adjust for inflation a threshold used to determine eligibility for benefits offered to “emerging growth companies” (“EGCs“) under the Jumpstart Our Business Startups (JOBS) Act.

The SEC is required to make inflation adjustments to certain JOBS Act rules at least once every five years after it was enacted on April 5, 2012. In addition to the inflation adjustments, the SEC adopted technical amendments to conform several rules and forms to amendments made to the Securities Act of 1933 (“Securities Act“) and the Securities Exchange Act of 1934 (“Exchange Act“) by Title I of the JOBS Act. The Commission approved the new thresholds on March 31. They will become effective when they are published in the Federal Register.

The Commission provided a helpful chart that sets out the inflation-adjusted amounts for the maximum amount of offerings and investment limits, specifically: (i) the maximum aggregate amount an issuer can sell in a 12-month period; (ii) the threshold for assessing an investor’s annual income or net worth to determine investment limits; (iii) the lower threshold of Regulation Crowdfunding securities permitted to be sold to an investor if annual income or net worth is less than the adjusted thresholds; (iv) the maximum amount that can be sold to an investor under Regulation Crowdfunding in a 12-month period; and (v) the inflation-adjusted amounts for determining financial statement requirements.

Also, pursuant to sections of the Securities Act and the Exchange Act added by the JOBS Act, which define the term “emerging growth company,” every five years the Commission is directed to index the annual gross revenue amount used to determine EGC status to inflation. To carry out this statutory directive, the SEC has adopted amendments to Securities Act Rule 405 and Exchange Act Rule 12b-2 to include a definition for EGC that reflects an inflation-adjusted annual gross revenue threshold. Press Release.

Rating Agency Developments

 

On April 4, 2017, DBRS updated its methodology for rating U.S. residential mortgage-backed securities (RMBS). Report.

On April 4, 2017, DBRS published its methodology for rating U.S. Property Assessed Clean Energy (PACE) securitizations. Report.

On April 4, 2017, DBRS published its methodology for rating structured finance CDO restructurings. Report.

On April 4, 2017, Moody’s published its ratings methodology for assessing companies in the equipment and transportation rental industry. Report.

On March 31, 2017, DBRS published its master methodology for assessing European structured finance. Report.

On March 30, 2017, Fitch updated its rating criteria for U.S. public finance tender option bonds. Report.

On March 30, 2017, Moody’s updated its ratings methodology for market value collateralized loan obligations (MV CLOs). Report.

Delegated Regulation Further Extending Temporary Clearing Exception for PSAs Under the Regulation on OTC Derivatives, CCPS and Trade Repositories (Regulation 648/2012) EMIR Published in OJ

 

An amendment to EMIR entitled Commission Delegated Regulation (EU) 2017/610 was published in the Official Journal of the EU (“OJ“). The Delegated Regulation concerns the extension of transitional periods relating to Pension Scheme Arrangements (“PSAs“) and was adopted by the European Commission on December 20, 2016. The Delegated Regulation came into force the day after it was published in the OJ, being April 1, 2017.

Wells Fargo Wins Summary Judgment Motion on All Claims Brought by German Bank LBBW Luxemburg

 

On March 30, 2017, Judge J. Paul Oetken granted Defendants Wells Fargo Securities LLC (“Wells Fargo“), f/k/a Wachovia Capital Markets LLC (“Wachovia“), and Fortis Securities LLC’s motion for summary judgment, dismissing the remaining causes of action and closing the case in LBBW Luxemburg S.A. v. Wells Fargo Securities LLC in the United States District Court for the Southern District of New York.

In a prior motion to dismiss order in 2014, the Court granted in part Defendants’ motion to dismiss, “keeping alive” only one theory of liability brought by LBBW. That remaining theory was that Wachovia’s internal valuation markdown of the Grand Avenue II (“GAII“) CDO Preference Shares, for which Defendants had served as some of the initial purchasers, on the same day it issued those shares allegedly signaled Wachovia’s potential misrepresentation or omission to purchasers of other GAII’s securities. Plaintiffs argued this markdown supported a plausible inference that Wachovia knowingly misrepresented the value of CDO shares and constituted circumstantial evidence of conscious misbehavior.

In its ruling, the Court held that LBBW failed to show that it conveyed its right to sue to another German entity, Landesbank, when the two companies merged in 2014, and therefore failed to establish standing.

Judge Oetken also found that LBBW failed to overcome the motion for summary judgment on the merits. The Court found that LBBW’s single surviving theory of liability was unsupported by the record, as discovery in the case had not produced evidence to connect the markdown to any secretly held view by Wells Fargo that GAII’s portfolio of assets was in trouble.

The Court also rejected the fraud claims brought against Defendants, finding that LBBW failed to point to specific evidence as to a misrepresentation or material omission on Defendants’ part based on the single surviving theory. Judge Oetken also dismissed constructive fraud and negligent misrepresentation claims against Defendants, concluding again that there was a lack of evidence to support any misrepresentation, an essential element of both claims. Finally, the Court found that LBBW’s breach of contract claim, which alleged that Defendants agreed to notify it of any material changes to the CDO’s capital structure, must fail, as the “evidence establishes beyond genuine dispute that the internal markdown on the Preference Shares was not related to any change in Wachovia’s view of GAII’s underlying portfolio of assets.”

In addition to granting Defendants’ motion for summary judgment, Judge Oetken also denied LBBW’s motion to supplement the summary judgment record as untimely; LBBW’s motion to strike certain of Defendants’ arguments; and LBBW’s motion for adverse inference sanctions. Opinion.

SDNY Grants Defendant GreenPoint Mortgage Summary Judgment

 

On March 29, 2017, Judge Andrew L. Carter, Jr., of the United States District Court for the Southern District of New York granted Defendant GreenPoint Mortgage Funding, Inc.’s (“GreenPoint“) motion for summary judgment, dismissing all causes of action against it as time-barred and terminating the case in Lehman XS Trust et al. v. GreenPoint Mortgage Funding, Inc.

Plaintiff Trustee U.S. Bank National Association, on behalf of the Lehman XS Trust, Series 2006-GP2 (“GP2“), Lehman XS Trust, Series 2006-GP3 (“GP3“), and Lehman XS Trust, Series 2006-GP4 (“GP4“) (collectively, the “Trusts“), and Freddie Mac Conservator Federal Housing Finance Agency (collectively, “Plaintiffs“) brought consolidated claims against GreenPoint regarding GP2, GP3, and GP4. Plaintiffs alleged breach of contract and indemnification claims for specific performance and damages arising out of GreenPoint’s alleged breach of certain representations and warranties.

Citing N.Y. C.P.L.R. § 214(3), the Court first found that Plaintiffs’ breach of contract claims under the mortgage loan purchase agreements (“MLPA“) for all three Trusts were time-barred under New York state’s six-year statute of limitations for breach of contract actions. The Trusts’ respective MLPAs required GreenPoint to cure or repurchase the defective loans in the event that any of the mortgage loans breached these representations and warranties. The closing dates for the Trusts were as follows: GP2 on May 15, 2006; GP3 on June 15, 2006; and GP4 on July 17, 2006. FHFA filed summons with notice for GP2 on May 30, 2012; for GP3 on June 29, 2012; and for GP4 on July 30, 2012.

Judge Carter then rejected Plaintiffs’ indemnification claims arising out of GreenPoint’s alleged breaches of representations and warranties. Plaintiffs sought indemnification for its losses, costs, fees, and expenses arising out of and related to the breaches of GreenPoint’s representations and warranties. Since Plaintiffs did not face liability to a third party as a result of the alleged breaches, the Court held that Plaintiffs’ indemnification cause of action was “more appropriately characterized as one to recover losses incurred by breach of contract” and therefore also barred by the statute of limitations.

Finally, the Court dismissed as time-barred Plaintiffs’ newly alleged causes of action for breach of GreenPoint’s representations and warranties made in the Trusts’ Indemnification Agreements, which provide for indemnity to the Trusts and other entities for claims arising out of breaches of the representations and warranties made in the information provided by or on behalf of GreenPoint for inclusion in the Prospectus Supplements. Opinion.

SEC Division of Investment Management Issues Guidance on Holding Companies and the Transient Investment Company Rule Under the Investment Company Act

 

Earlier this month, the SEC Division of Investment Management issued guidance with respect to situations in which an operating company may find that, upon the occurrence of an extraordinary event, it meets the definition of an “investment company” under the Investment Company Act of 1940 (“Company Act“), even though it intends to remain in such status only temporarily. Absent an exclusion or exemption from this definition, the operating company may be required to register under the Company Act. Rule 3a-2 under the Company Act, however, provides a one-year safe harbor for such transient investment companies if certain conditions are satisfied.

The Staff of the Division of Investment Management has received inquiries regarding the commencement of the one-year safe harbor as it applies to holding companies that are engaged in various businesses operating through wholly owned and majority-owned subsidiaries where neither the holding companies nor their subsidiaries are regulated as investment companies (“Holding Companies“).

In response, the Staff has clarified that the one-year safe harbor period does not begin until the occurrence of an extraordinary event causes a Holding Company to have certain characteristics of an investment company. It is the staff’s view that when adopting Rule 3a-2, the Commission did not intend to limit the circumstances under which an issuer could rely on the rule in such a way that Holding Companies are treated differently than other issuers because of the Holding Companies’ organizational structures.

CFPB Proposes to Provide Flexibility in Collecting Information

 

On March 24, 2017, the Consumer Financial Protection Bureau (“CFPB“) released a proposal to amend Equal Credit Opportunity Act regulations. The proposal would provide flexibility for lenders in collecting information about mortgage applicants’ ethnicity, race and sex. The CFPB’s proposal is meant to provide clarity to mortgage lenders regarding their obligations under the law and to promote compliance with rules intended to ensure that consumers are treated fairly. The proposal is open for public comment for 30 days after its publication in the Federal Register. Press Release. Proposal.

Rating Agency Developments

 

On March 29, 2017, Moody’s published its approach to assessing credit risk for multilateral development banks and other supranational entities. Report.

On March 28, 2017, DBRS published its methodology for rating Canadian ABCP and related enhancement features. Report.

On March 28, 2017, Fitch published its U.K. income-contingent student loans rating criteria. Report.

On March 28, 2017, Fitch published an update to its rating criteria for trust preferred collateralized debt obligations (TruPS CDOs). Release.

On March 28, 2017, KBRA published its U.S. consumer loan ABS rating methodology. Report.

On March 24, 2017, DBRS published its methodology for rating companies in the forest products industry. Report.

On March 24, 2017, DBRS published its methodology for rating companies in the radio broadcasting industry. Report.

On March 24, 2017, DBRS published its methodology for rating companies in the television broadcasting industry. Report.

On March 24, 2017, DBRS published its methodology for rating companies in the printing industry. Report.

On March 24, 2017, DBRS published its methodology for rating companies in the publishing industry. Report.

On March 24, 2017, Moody’s published an update to its local currency country risk ceiling for bonds and other local currency obligations. Report.

On March 23, 2017, DBRS published its North American CMBS multi-borrower rating methodology. Report.

On March 23, 2017, Fitch published an update to its criteria for estimating losses on U.S. mortgage pools for RMBS transactions. Report.

SEC Adopts T+2 Settlement Cycle for Securities Transactions

 

On March 22, 2017, the Securities and Exchange Commission (SEC) adopted an amendment to Rule 15c6‑1(a), shortening the standard settlement cycle for most broker-dealer securities transactions by one business day, beginning on September 5, 2017. The amended rules shorten the settlement cycle from three business days (T+3) to two business days (T+2). The purpose of the amended rule is to enhance efficiency, reduce risk and ensure coordinated and expeditious transition by market participants to a shortened standard settlement cycle. Release.

Banking Agencies Issue Joint Report to Congress Under the Economic Growth and Regulatory Paperwork Reduction Act of 1996

 

On March 21, 2017, the Office of the Comptroller of the Currency (OCC) announced that the Federal Financial Institutions Examination Council (“FFIEC“) issued a “EGRPRA Joint Report to Congress,” which details a review of rules affecting financial institutions conducted under the Economic Growth and Regulatory Paperwork Reduction Act of 1996, which requires federal banking agencies and the FFIEC to conduct a review of their rules at least every 10 years to identify outdated or unnecessary regulations. The review focused on the effect of regulations on smaller institutions, such as community banks and savings associations. The report describes joint actions planned or taken by the federal financial institutions regulators, including simplifying regulatory capital rules for community banks and savings associations, streamlining reports of condition and income, increasing the appraisal threshold for commercial real estate loans and expanding the number of institutions eligible for less frequent examination cycles. Release. Full Report.