On October 18, the OCC provided guidance to national banks and federal savings associations with assets of $10 billion or less on using stress testing to assess risk in their loan portfolios. The guidance indicates that stress tests do not need to involve sophisticated analysis or third-party consultative support. The OCC is also making available a new portfolio level stress tool for income producing commercial real estate loans. OCC Release.
Month: October 2012
Journey to the FCA
On October 16, the FSA published a paper that sets out how the UK’s new financial conduct regulator, the Financial Conduct Authority (FCA), will operate, entitled “Journey to the FCA.” The paper was accompanied by a summary of key points. Amongst other things, the paper sets out:
- how the FCA intends to use some its new powers, including those that allow it to ban products that pose unacceptable risks to consumers and misleading financial promotions;
- that the FCA intends to consult in November 2012 on its new Business Model threshold condition, whereby firms will be required to make clear to the FCA how their business model is sustainable, and meets the needs of clients and customers;
- the supervision model that the FCA intends to adopt;
- that the FCA will continue the FSA’s policy of credible deterrence; and
- how the FCA intends to use its new Policy, Risk and Research Division to identify risks in the financial markets.
The paper was accompanied by a speech by Martin Wheatley, Managing Director, FSA, and CEO Designate, FCA, entitled “Launch of the Journey to the FCA.” The FSA invites comments on the paper by December 14.
The PRA’s Approach to Banking Supervision
On October 15, the Bank of England and the FSA published a joint paper on how the UK’s new prudential regulator for deposit takers and investment firms, the Prudential Regulation Authority (the PRA), will operate, entitled “The PRA’s approach to banking supervision.” The paper is designed to provide an overall description of the PRA and the approach it will take in relation to:
- its objective to promote the safety and soundness of firms primarily by seeking to avoid adverse effects on financial stability (the PRA acknowledges that, while firm failures will happen, it will seek to ensure that they are orderly);
- the new statutory threshold requirements for firms to be permitted to carry on regulated activities;
- judgement based and forward looking supervision; and
- working closely with both the FCA and the Financial Policy Committee, which will be able to make recommendations and give directions to the PRA.
The paper was accompanied by a speech by Andrew Bailey, Managing Director, Prudential Business Unit of the FSA, entitled “The future of banking regulation in the UK.”
ABS East 2012: Investor Focused. Investor Driven.
On October 21–23, Orrick will be an Associate level sponsor of this year’s IMN’s ABS East Conference. The ABS East 2012 Conference will provide a relevant and timely program that reflects the concerns of the buy side equally along with that of other market participants, thus giving the structured finance investor community a platform to express their views on the market. On October 22, Orrick Partner Howard Altarescu will moderate a panel on “Private Label RMBS Reform: What is Needed to Restart the Market?” For more information, please click here.
FSA Bans and Fines Former Managing Director of Welcome Financial Services Ltd for Market Abuse
The FSA published its final notice dated October 8 in relation to John Blake, the former managing director of Welcome Financial Services Ltd (Welcome). In its final notice the FSA states that Mr. Blake engaged in market abuse, and has fined him £100,000 and banned him from performing any function relating to a regulated activity.
Mr. Blake, together with other directors on the board of Welcome, approved Welcome’s 2007 annual report, which contained false and misleading statements. As Welcome was at the time a subsidiary of the (as was) publically listed Cattles plc (which has since been de-listed), the false and misleading statements in the Welcome report were included in Cattles’ 2007 annual report and rights issue prospectus. The FSA considered that Mr. Blake had been “knowingly concerned” in the failure of Welcome to take reasonable care to organise and control its affairs responsibly and effectively.
The FSA viewed Mr. Blake’s conduct as particularly serious as it took place over a sustained period (approximately 18 months) and had a very serious impact both on Cattles’ shareholders (who lost all or virtually all of their investment) and on market confidence.
Bribery Act 2010: Revised Policies on Facilitation Payments, Business Expenditure and Corporate Self-Reporting
On October 9, the Serious Fraud Office (SFO) issued revised policy statements in respect of facilitation payments, business expenditure (gifts and corporate hospitality) and self-reporting. The changes reflect the SFO’s recent shift back towards its traditional role of investigating and prosecuting serious crime, rather than acting in a more regulatory capacity.
In summary, the revised statements make the following key points:
- facilitation payments are bribes and are illegal under the Bribery Act 2010, irrespective of their size or frequency;
- although genuine hospitality or promotional business expenditure is an important and well-established part of doing business, it is important to be aware that bribes can be disguised as legitimate expenditure; and
- the Guidance on Corporate Prosecutions sets out the extent to which self reporting is relevant to the decision to prosecute. Self reporting will not automatically avert prosecution and, even if the SFO does not prosecute reported violations, it can still prosecute unreported violations and provide information to other bodies such as foreign police forces.
Short Selling: ESMA Questions and Answers
On October 10, ESMA published a first update to its Questions and Answers on the implementation of the Regulation on short selling and certain aspects of credit default swaps (the Short Selling Regulation). ESMA’s Questions and Answers provides responses to questions posed by market participants and regulatory authorities, with the aim of promoting the consistent application of the Short Selling Regulation throughout Europe. The Questions and Answers have been updated in respect of questions related to:
- the transparency of net short positions;
- calculating the net short position;
- uncovered short sales;
- the duration adjustment for calculating net short positions in sovereign debt;
- net short positions when different entities in a group have long or short positions or for fund management activities; and
- exemption for market making activities and for primary dealers operations.
Consultation on the Recovery and Resolution of Non-Bank Financial Institutions
On October 5, the European Commission published a consultation paper on a possible framework for the recovery and resolution of non-bank financial institutions. The consultation paper covers three types of institutions and focuses on:
- central counterparties and central securities depositories (financial market infrastructures);
- insurance and reinsurance firms; and
- payment systems and other non-bank financial institutions.
For each of these groups of financial institutions the consultation paper first looks to ascertain how and when the failure of a financial institution can threaten the stability of the financial markets, and then considers what arrangements could be needed to ensure that such failures are resolved in an orderly manner.
The initiative follows the adoption, on June 6, of a Commission proposal for an EU framework in this area for banks and investment firms. The Commission invites responses by December 28.
Bond Insurer Syncora Sues JPMorgan, Bear Stearns, and EMC Mortgage
On October 5, Syncora Guarantee Inc. filed suit in New York state court against JPMorgan Chase Bank NA, Bear Stearns & Co., Inc., and EMC Mortgage LLC. Syncora asserts claims of breach of contract, fraudulent inducement, and tortious interference in connection with a 2007 re-securitization of real estate mortgage investment conduits (REMICs) that consisted of certificates from four Bear Stearns RMBS. The complaint alleges that the defendants misrepresented the quality of the mortgage loans underlying the RMBS and the quality of the due diligence performed in connection with the origination of those loans. Syncora claims it has paid out over $94 million to insured investors on a transaction that experienced cumulative losses of over $111 million. Syncora seeks compensatory and punitive damages, reimbursement, and attorneys fees and costs. Complaint.
SEC OCIE Letter on National Exam Program Initiative
On October 9, the SEC’s Office of Compliance Inspections and Examinations (OCIE) sent letters of introduction addressed to the Senior Executives of newly-registered advisers to private funds as part of their nationwide outreach announcing a new initiative under the National Exam Program, in which OCIE will be conducting “focused, risk-based examinations of advisers to private funds.”
Under this initiative, the exam staff will review one or more high-risk areas of a private fund adviser, which could include marketing materials, conflicts of interest in the portfolio management process, such as investment and trade allocations, safety of client assets in the context of the Advisers Act custody rule, and valuation policies and procedures, especially with regard to illiquid or difficult to value instruments. As with all OCIE exams, the outcome of the exam could include no findings, an “examination summary letter” of compliance deficiencies, or a referral to the SEC’s Division of Enforcement or another regulator, such as FINRA or a state. SEC OCIE Letter.