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Proposed Regulations on Volcker Rule
On October 11, the SEC, Fed, FDIC and OCC each issued a request for comment on proposed regulations implementing the requirements of Section 619 of the Dodd-Frank Act, otherwise known as the Volcker Rule. The Volcker Rule generally prohibits: (i) insured depository institutions, bank holding companies, and their subsidiaries or affiliates from engaging in short-term proprietary trading of any security, derivative, or certain other financial instruments for a banking entity's own account; (ii) owning, sponsoring, or having certain relationships with, a hedge fund or private equity fund; and (iii) banking entities from engaging in an exempted transaction or activity if it would involve a material conflict of interest between the banking entity and its clients or counterparties or would result in a material exposure to high-risk assets. Comments must be submitted by January 13. Proposed Rule. Fed Release. FDIC Release. OCC Release.
SEC Proposed Rules for Registration of Swap Dealers and Participants
On October 12, the SEC proposed rules, pursuant to Title VII of the Dodd-Frank Act, setting out the process security-based swap dealers and major security-based swap participants must follow to register with the SEC. Comments must be submitted within 60 days after publication in the Federal Register. SEC Release. SEC Proposed Rule.
Fed Proposed Rules for Reserve Banks and Depository Institutions
On October 11, the Fed proposed rules to amend Regulation D (Reserve Requirements of Depository Institutions) and Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire). The proposed rules are intended to simplify the administration of reserve requirements and reduce administrative and operational costs for depository institutions and Reserve Banks. Comments must be submitted within 60 days after publication in the Federal Register. Fed Release. Proposed Amendment to Reg D. Proposed Amendment to Reg J.
FSOC Proposed Rule on Systemic Importance of Nonbank Financial Companies
On October 11, pursuant to Section 113 of the Dodd-Frank Act and in response to comments to a proposed rule issued on January 18, the Financial Stability Oversight Council issued a second notice of proposed rulemaking and proposed interpretive guidance to provide additional details regarding the framework the FSOC intends to use in the process of assessing whether a nonbank financial company could pose a threat to U.S. financial stability. Comments must be submitted within 60 days of publication in the Federal Register.
FSOC Proposed Rule.
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On October 12, S&P requested comments on proposed changed to the methodologies it uses to rate CDOs backed by structured finance securities. S&P Release.
On October 12, S&P requested comment on proposals to update its methodology for rating CDOs and TOBs backed by pools of municipal debt. S&P Release.
On October 11, DBRS released its U.S. RMBS loss model and rating methodology. DBRS Release.
On October 11, DBRS released a unified interest rate model for U.S. RMBS. DBRS Release.
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Federal Judge Dismisses MBIA Lawsuit Against the FDIC
On October 6, 2011, Judge Amy Jackson of the Federal District Court in the District of Columbia dismissed an action brought by MBIA Insurance Corporation ("MBIA") against the FDIC, both in its capacity as receiver for IndyMac Bank and in its corporate capacity, arising out of losses MBIA incurred in connection with its agreements to insure investors in certain IndyMac RMBS. MBIA attempted to distinguish itself from other general creditors of IndyMac by arguing that its losses were actually "administrative expenses" of the FDIC, which are entitled to priority distribution. The court granted the FDIC's motion to dismiss based on lack of subject matter jurisdiction and failure to state a claim, finding that the FDIC had not expressly approved the insuring agreements between MBIA and IndyMac as necessary administrative expenses. It rejected MBIA's theory that the FDIC had approved the expenses by not specifically repudiating the agreements because "approval by omission" was inconsistent with the applicable statutes and regulations, and potentially could transform all general creditor claims based on unrepudiated obligations of the failed bank into administrative expenses entitled to priority. Opinion.
Loreley Financing Initiates CDO Actions Against Deutsche Bank, Bank of America, Countrywide and Merrill Lynch
On October 5, 2011, Loreley Financing ("Loreley"), a group of special purpose entities based in the Channel Islands, commenced two actions in New York State Supreme Court concerning the sale of CDO's. In the first action, Loreley filed a complaint against Deutsche Bank in connection with a $440 million investment in six CDOs between 2005 and 2007. Loreley accuses Deutsche Bank of concealing inside knowledge, gathered through its work originating subprime loans and securitizing RMBS, that the loans underlying the CDOs were highly risky and very likely to default. Loreley alleges that Deutsche Bank marketed the CDOs to Loreley while offloading the riskiest RMBS off its own books into the CDOs and contemporaneously advising favored clients to place short bets against the same assets. The complaint alleges common-law claims for fraud, rescission, conspiracy to defraud, aiding and abetting fraud, fraudulent conveyance, and unjust enrichment. Complaint.
The second action, in which Loreley has to date filed only a summons with notice, involves preliminary allegations against Bank of America, Countrywide and Merrill Lynch based on a $92 million investment in two CDOs. Without making any factual allegations, Loreley asserts common-law claims for rescission, fraud, fraudulent inducement, conspiracy to defraud, fraudulent conveyance, aiding and abetting fraud, breach of fiduciary duty, and unjust enrichment. Summons.
House Committee Investigates Cost of Federal Housing Finance Agency RMBS Lawsuits
The House Committee on Oversight and Government Reform, as part of its ongoing monitoring of the Federal Housing Finance Agency ("FHFA"), is investigating the cost to the government of numerous lawsuits against financial institutions brought on behalf of Fannie Mae and Freddie Mac by Quinn Emanuel and Kasowitz Benson. In a September 29, 2011 letter to the Acting Director of the FHFA, Rep. Darrell Issa (R-Cal.), Chairman of the committee, requested detailed information about the FHFA's decision-making process in selecting counsel, the terms of the representation agreements with each firm, the expected value of the lawsuits, and the expected cost of the representations. Rep. Issa requested an explanation of the FHFA's decision to use private law firms instead of government lawyers and also requested copies of all RMBS-related communications between the FHFA and the Department of Justice or other government agencies. Rep. Issa asked the FHFA to respond by October 13. Letter.
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