On April 8, pursuant to Section 719(b) of the Dodd-Frank Act, the CFTC and the SEC released a joint study on the feasibility of requiring the derivatives industry to adopt standardized computer-readable algorithmic descriptions for complex and standardized financial derivatives. The Commissions concluded that derivatives can be represented using a common set of computer-readable descriptions, but indicated areas where further analysis and study are needed before mandating their use. CFTC Release. Study.
Month: April 2011
Joint Proposed Rule on Resolution Plan Reporting
On April 12, the Fed and the FDIC released a proposed rule pursuant to Section 165(d) of the Dodd-Frank Act which would require systemically significant bank holding companies and nonbank financial companies to submit annual resolution plans and quarterly credit exposure reports. The requirements would apply to bank holding companies with consolidated assets of $50 billion or more or nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Fed. Comments must be submitted by June 10. Joint Release. Proposed Rule.
Joint Proposed Rule on Swap Margin and Capital Requirements
On April 12, the FDIC, Fed, FCA, FHFA, and OCC issued a notice of proposed rulemaking establishing margin and capital requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants pursuant to Sections 731 and 764 of the Dodd-Frank Act. The proposal adopts a risk-based approach in establishing the minimum amount of margin a covered swap entity must collect from a counterparty and the frequency with which it must calculate and collect such margin. On April 12, the CFTC held an open meeting to discuss and approve a similar proposed rule. The Commissioners observed that significant inconsistencies between the CFTC rule and the rule proposed by the aforementioned agencies would need to be reconciled in future rulemaking actions. FDIC Release. Proposed Rule. CFTC Hearing Link.
Senate Report on Causes of Financial Crisis
On April 13, the Senate Permanent Subcommittee on Investigations issued a report examining the business practices of large broker-dealers, rating agencies, and other market participants leading up to the recent financial crisis. The report examines four key aspects of the financial crisis: (i) high risk lending, (ii) regulatory failures, (iii) inflated credit ratings, and (iv) investment bank abuses, and provides recommendations to address each factor. Senate Report.
Bill to Reinstate Rule 436(g) Introduced
On April 14, Representative Steve Stivers introduced a bill to reinstate Rule 436(g) of the Securities Act. The bill would repeal Section 939G of the Dodd-Frank Act, under which Section 436(g) was repealed. The reinstatement of Rule 436(g) would exclude NRSROs from being treated as “experts” when their ratings are included in a registration statement. A copy of the bill will be posted on Thomas.
Agency Enforcement Action Against Servicers
On April 13, the Fed, OCC, and OTS announced formal enforcement actions against large servicers related to their foreclosure practices based on findings of an interagency review of foreclosure policies and practices. The FDIC also participated in the review as a back-up regulator. The enforcement orders require servicers to take certain actions to remedy deficiencies identified by the review. Interagency Review. Fed Release. OCC Release. OTS Release. FDIC Release.
Shareholder Derivative Action Brought Against Bank of America Executives for Losses Due to Suspension of Foreclosures
O’Hare et al. v. Moynihan et al., No. 11 – 103729 (Sup. Ct. N.Y. Mar. 28, 2011)
A shareholder derivative action was brought in New York Supreme Court against members of the Board of Directors of Bank of America and certain of its executive officers, alleging breaches of fiduciary duties during a ten-month period in 2010. Plaintiffs allege that defendants issued materially false and misleading statements regarding Bank of America’s business, concealing defects in the recording of mortgages and improprieties with respect to the preparation of foreclosure paperwork. Plaintiffs allege that these misstatements harmed Bank of America and its investors when the company had to temporarily discontinue foreclosures and admit to the problems it was experiencing. Complaint.
Putative Investor Class Action Brought in S.D.N.Y. Against Bank of America Alleging False Statements Relating to Bank of America’s RMBS Exposure
Anchorage Police & Fire Retirement System v. Bank of America Corp., No. 11-2216 (S.D.N.Y. Mar. 30, 2011)
An Alaska retirement fund filed a putative class action complaint against Bank of America and certain of its directors and officers in the Southern District of New York. Plaintiff bring claims under Sections 10(b) and 20(a) of the ’34 Act, alleging that defendants concealed material information and made false and misleading statements relating to Bank of America’s exposure to several forms of risk, including Bank of America’s (1) exposure to faulty mortgages originated by Countrywide; (2) exposure to mortgages upon which it could not legally foreclose; (3) exposure to systemic mortgage servicing problems; and (4) “dollar rolling” practice, through which the company allegedly artificially reduced reported leverage ratios while taking on more risk than it disclosed to the market and federal regulators. Complaint.
New RMBS Investor Action Filed Against Countrywide Defendants Over $48 Million in RMBS
American Fidelity Assurance Co. v. Countrywide Financial Corp., No. 11-361 (W.D. Okla. Apr. 1, 2011)
Institutional investor American Fidelity Assurance Company (“AFAC”) filed a complaint against Countrywide Financial, certain of its affliates, Bank of America, and variousformer executives of Countrywide, alleging that defendants sold AFAC approximately $48 million in RMBS pursuant to registration statements and prospectuses that contained untrue statements and omissions of material facts. AFAC asserts claims under Sections 11, 12(a)(2), and 15 of the ’33 Act and Sections 10(b) and 20(a) of the ’34 Act, in addition to claims for common law fraud and negligent misrepresentation. AFAC alleges that Countrywide systematically ignored its underwriting standards in order to increase its market share of mortgage products, and mislead plaintiff into believing it was buying highly rated and safe RMBS. Complaint.
S.D.N.Y. Grants in Part and Denies in Part Motion to Dismiss Multiple Actions Against Wachovia
In re Wachovia Equity Sec. Litig., No. 09 Civ. 4473 (S.D.N.Y. Mar. 31, 2011) (Sullivan, J.)
Investors in equity and debt securities of Wachovia brought four related actions against Wachovia and several related entities and individuals, Wachovia’s underwriters and its auditors alleging claims under Section 10(b) of the ’34 Act, and Rule 10b-5 thereunder, and Sections 11, 12(a)(2), and 15 of the ’33 Act. In considering four complaints and seven motions to dismiss, the court granted in part and denied in part the motions. The court found that the Section 10(b) claims, which included allegations of fraudulent concealment of the true value of Wachovia’s CDO holdings, failed for insufficient allegations of scienter. The court also found that: (1) plaintiffs cannot assert claims based on offerings they did not purchase; (2) tolling of the ’33 Act’s one-year statute of limitations was appropriate due to a pending class action; (3) allegations of misstatements of loan-to-value ratios in Wachovia’s mortgage lending portfolio were sufficient; and (4) the Section 11 claim against Wachovia’s auditor survives because a due diligence defense cannot be evaluated on a motion to dismiss. Decision.