The Legacy of Lehman Series

Faced with huge losses in the subprime mortgage market, Lehman Brothers Holdings Inc. (the ultimate parent of the Lehman group) filed for Chapter 11 bankruptcy protection on September 15, 2008, a momentous event which preceded the collapse and break-up of that group, including the filing for administration of Lehman Brothers International (Europe), the main operating subsidiary for the UK and Europe.

Looking back from the perspective of the sixth anniversary of the collapse, its consequences still occupy the English courts with numerous decided, settled, on-going and forthcoming cases.  To mark the anniversary, Orrick's 'Legacy of Lehman' series of articles will consider the aftermath of Lehman's demise focusing on financial industry regulation in the UK and across Europe.  We aim to consider certain key pieces of Lehman-related litigation in the English courts and the principles which resulted from those cases.

This first update in our Lehman series considers the introduction of the EU Bank Recovery and Resolution Directive (BRRD) which becomes mandatory across Europe on January 1, 2015. Subsequent topics will include the development of legal principles relating to client assets and the distribution of assets over which clients have proprietary interests, the distribution of surplus monies – the so called 'waterfall litigation,' the interpretation of ISDA contracts, pension issues and the introductions of European Market Infrastructure Regulations.  To access the alert, click here.

Fed and CFPB Announce Thresholds for Regulation Z and Regulation M Exempt Consumer Credit and Lease Transactions

On September 9, the Fed and CFPB announced increases in the dollar thresholds in Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) for exempt consumer credit and lease transactions.  These increases are consistent with the Dodd-Frank Act amendments to adjust these thresholds annually by the annual percentage increase in the Consumer Price Index.  Transactions at or below the thresholds are subject to the protections of the regulations.  The adjustments will become effective on January 1, 2015.  Fed Statement.  CFPB Statement.  Consumer Leasing Amendment.  TILA Amendment. 

CFTC Provides Relief from Certain Agency Regulations to be Consistent with JOBS Act SEC Amendments

On September 9, the CFTC issued an exemptive letter, which provides relief from certain provisions of Regulations 4.7(b) and 4.13(a)(3) restricting marketing to the public.  The exemptive letter harmonizes these rules with Rule 506(c) of Regulation D and Rule 144A as amended pursuant to the JOBS Act.  Release.  Exemptive Letter.  

SEC Proposes New Rule on Communications Involving Security-Based Swaps

On September 8, the SEC proposed a new rule that certain communications involving security-based swaps that may be purchased only by eligible contract participants will not be deemed for purposes of Section 5 of the Securities Act to constitute offers of such security-based swaps or any guarantees of such security-based swaps.  Comments should be received by the SEC on or before November 10, 2014.   Proposed Rule.  

Agencies Propose Revisions to Q&A on Community Reinvestment

On September 8, the Fed, FDIC and OCC proposed revisions to the Interagency Questions and Answers Regarding Community Reinvestment.  The Q&A provides guidance on the implementation of the Community Reinvestment Act (CRA).  Among the other revisions, the revised Q&A address alternative systems for delivering retail banking and offer guidance on how examiners evaluate innovativeness in institution's products and services. Comments will be due 60 days after publication in the Federal Register.  FDIC Statement.  Fed Statement.  Proposing Release.

SEC Adopts Final Reg AB II Rules

Orrick's Structured Finance Group published a summary of the final Regulation AB II rules adopted by the SEC on August 27, 2014.  The new and amended rules govern the registration, offering process, disclosure and reporting for SEC registered asset-backed securities.  The summary is available here and the final rules are available here.  

SEC Adopts Final Rules Relating to NRSROs and Third-Party Due Diligence Reports

Orrick's Structured Finance Group published a summary of the final rules relating to NRSROs and Third-Party Due Diligence Reports adopted by the SEC on August 27, 2014.  Among other things, the new and amended rules impose new obligations on ABS issuers and underwriters to publicly file third-party due diligence reports and require the providers of third-party due-diligence services to provide written certification to each NRSROs that produces a rating related to the due diligence services rendered.  Issuers, underwriters, and providers of third-party due-diligence services must comply with the new rules discussed in the alert by June 15, 2015.  Orrick Summary.  Final Rules.

On September 9, Moody's released its methodology for rating consumer loan-backed ABS.  Report.

On September 9, Fitch released its methodology for rating SHFA MBS Pass-Through bonds.  Report.

On September 8, Fitch released its global criteria for rating rental fleet ABS.  Report.

MBS Claims Against Bank of America Dismissed

On September 9, Judge Mariana Pfaelzer of the U.S. District Court for the Central District of California granted Bank of America's motion to dismiss claims for fraudulent concealment, negligent misrepresentation, aiding and abetting, mutual mistake and successor liability brought by Deutsche Zentral-Genossenschaftsbank AG (DZ Bank) in a lawsuit over Bank of America's MBS offerings.  In doing so, Judge Pfaelzer extended her earlier decision in the case, dismissing as time-barred under German and New York law, claims regarding the sale of Countrywide MBS.  The court applied the same analysis to offerings by Bank of America/Merrill Lynch not backed by Countrywide loans.  Claims related to credit ratings remain in the case.  Judge Pfaelzer also declined to suggest to the Judicial Panel of Multidistrict litigation that the Panel remand DZ Bank's case to state court.  Order. 

Morgan Stanley Settles MBS Class Action with Pension Funds

On September 8, a stipulation and agreement of settlement was filed in relation to an action brought against Morgan Stanley & Co. by a group of pension funds led by Public Employees' Retirement System of Mississippi and the West Virginia Investment Management Board.  In the putative class suit, the funds alleged that Morgan Stanley misled institutional investors about the mortgage pools underpinning its mortgage-backed securities.  Under the settlement agreement, Morgan Stanley will pay US$95 million to buyers of certain mortgage-backed securities issued in 2006 and 2007 without admitting to liability or wrongdoing.  Stipulation and Agreement.

BCBS Report on Basel III Monitoring Exercise

On September 11, the BCBS issued a report and an accompanying press release, which summarized the aggregate results of the latest Basel III monitoring exercise, using data as of December 31, 2013.  The report covers analysis relating to matters including capital ratios, capital shortfalls, level of capital, composition of capital and leverage ratio.

Data, as of December 31, 2013, shows that most large internationally active banks now meet the Basel III risk-based capital minimum requirements, and capital shortfalls have been further reduced relative to the target levels.

A total of 227 banks participated in the study, comprising of 102 Group 1 banks (internationally active banks that have Tier 1 capital of more than EUR3 billion) and 125 Group 2 banks (a representative sample of all other banks).  Report.  Press release. 

Council of EU Presidency Compromise Proposal on Benchmark Regulation

On September 10, the Presidency of the Council of the EU published its first compromise proposal (dated September 9, 2014) relating to the European Commission's proposed Regulation on indices used as benchmarks in financial instruments and financial contracts.  Compromise proposal.   

IOSCO Provides Update to Survey on Commodity Derivatives Markets Supervisory Principles

On September 9, IOSCO published an update to its survey on the principles for the regulation and supervision of commodity derivatives markets.  The final report provides an update on IOSCO's 2012 review of its principles for commodity derivatives markets.

Market authorities that submitted answers to the 2012 report were requested to update IOSCO as to their progress towards full implementation of the principles.  The majority of respondents were broadly compliant with the principles.  Where commodity derivative markets exist and market authorities acknowledged non-compliance, many of those market authorities have proposed or enacted initiatives aimed at achieving full compliance over time.  Update.