The Consumer Financial Protection Bureau (CFPB) recently issued an interim final rule, as well as an explanatory bulletin, to further detail and clarify the requirements of the agency’s mortgage servicing rules that were finalized in January 2013 (the Servicing Rules). The Servicing Rules implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amending the Real Estate Settlement Procedure Act of 1974 (RESPA) and the Truth in Lending Act (TILA) to provide borrowers with more detailed information regarding their loans, ensure that borrowers are not unexpectedly assessed charges or fees, and inform borrowers of alternatives to foreclosures.
Consumer Financial Protection Bureau Clarifies New Mortgage Servicing Rules
SEC Proposes Rules on Crowdfunding
On October 23, 2013, the Securities and Exchange Commission (SEC) proposed rules which would, if adopted, govern the offer and sale of securities under new Section 4(a)(6) (the “Crowdfunding Exemption”) of the Securities Act of 1933 (Securities Act), provide a framework for the regulation of registered funding portals and brokers, and exempt securities sold pursuant to the Crowdfunding Exemption from the registration requirements of Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act).
Out of Context- Delaware Clarifies on “Weak” Fairness Opinions
A footnote in a recent Delaware decision should relieve some of the anxiety felt in the investment banking community that the courts were inviting plaintiffs to allege fiduciary duty breaches by a target board in any sale where the fairness opinion analysis could be perceived as “weak.”
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SEC Chair White Addresses Possibility of Disclosure Reform
It is well known that Chair White and her staff have stressed that their immediate focus is on completing the mandatory rulemaking under the Dodd-Frank and JOBS Acts, but in a sign of possible things to come after that task, Chair White spoke to the National Association of Corporate Directors (NACD) about the risk of information overload in the disclosure companies provide to investors.
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Avoiding Insider Status in Bankruptcy: Lessons from Capmark Financial Group Inc. v. Goldman Sachs Credit Partners, L.P.
[Editor’s Note: The following piece is authored by Benjamin S. Kaminetzky of Davis Polk & Wardwell LLP.]
Through various affiliated entities, large financial institutions may have multiple touch points to a company client or multiple roles in a complex financial transaction. For example, one affiliate could have an equity interest in a company, another affiliate could have a lending relationship with the company and yet a third affiliate could provide financial advisory services to the same company. Such scenarios pose a risk that the lending entity will be deemed an ‘‘insider’’ of the company under the Bankruptcy Code (the ‘‘Code’’) or similar state law. Insider status may in turn have significant ramifications on any potential recovery from the target company in bankruptcy, putting financial institutions at significantly greater risk of having long- completed transactions reversed and funds clawed back and/or having their claims in bankruptcy sent to the back of the line.
Financial institutions therefore scored a significant victory on April 9, 2013, when Judge Robert Sweet of the United States District Court for the Southern District of New York dismissed Capmark Financial Group Inc.’s (‘‘Capmark’’) insider preference action against four lender affiliates of The Goldman Sachs Group, Inc. (‘‘Goldman Sachs’’), which arose out of Capmark’s 2009 bankruptcy. Davis Polk represented the Goldman Sachs lender affiliates. The court held that mere participation by corporate sister subsidiaries in lending and equity relationships with the debtor is insufficient with- out more to make the lending subsidiary an insider of the debtor, even if a sister subsidiary has a director on the debtor’s board. In doing so, the court reaffirmed that corporate veils separating a lender from an affiliated entity that may be an insider of the debtor will not lightly be disregarded, and that participation in an arm’s-length transaction as an ordinary commercial lender will not give rise to insider status. As a result, the Capmark decision should pose a substantial obstacle to claims alleging that a lender is an ‘‘insider’’ by virtue of affiliated entities’ contacts with a debtor, at least in the absence of evidence that the lender used the affiliates’ contacts to influence the debtor’s decisions.
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Appellate Court Holds PE Fund Potentially Liable for Bankrupt Portfolio Company’s Pension Obligations
[Editor’s Note: This piece is authored by Kirkland & Ellis LLP.]
A corporation that owns 80 percent (or in some cases 50 percent) or more of a bankrupt subsidiary is liable for 100 percent of the subsidiary’s unpaid pension obligations under the Employee Retirement Income Security Act (ERISA) regardless of the activities of the parent corporation. However, a PE fund formed as a partnership or LLC (rather than as a corporation) is liable under this ERISA controlled-group-liability doctrine for a bankrupt portfolio company’s pension obligations only if the PE fund is engaged in a “trade or business.”
In July 2013, a federal appellate court (reversing a 2012 district court pro-PE fund decision) concluded that a PE fund (formed as a partnership or LLC) is engaged in a trade or business and hence would be liable for its bankrupt portfolio company’s unpaid pension obligations if it owned the requisite percentage of its stock…
Because this is the first federal court of appeals to weigh in on this complex trade-or-business issue, there is considerable uncertainty whether a PE fund will ultimately be viewed as engaged in a trade or business for ERISA liability purposes and hence liable for an 80 percent(or in some cases 50 percent) or greater bankrupt portfolio company’s pension obligations. Because the ERISA provisions that could make a PE fund and its 80 percent (or in some cases 50 percent) or greater portfolio companies liable for the pension obligations of an 80 percent (or in some cases 50 percent) owned bankrupt portfolio company are exceedingly complex, each PE fund investment (and each restructuring of such an investment) should be reviewed with care
For the complete Newsletter, click here.
Court of Appeals for the Third Circuit Extends New Source Review “Past Violation” Rulings
[Editor’s Note: The following post is authored by Arnold & Porter LLP.]
On August 21, the U.S. Court of Appeals for the Third Circuit in the Homer City case joined and extended the consensus holdings of three other U.S. courts of appeals in rulings that failure to obtain a Prevention of Significant Deterioration (PSD) permit is a one-time and past rather than a continuing violation under Clean Air Act regulations. This decision has important implications for companies facing PSD enforcement cases brought by U.S. EPA, states or environmental groups pursuing citizen suits. This decision bolsters the consensus that the 5-year statute of limitations may apply to bar civil penalties for older alleged violations. The decision also breaks new ground by finding that current owners are not liable for past violations occurring on the watch of former owners, and those former owners are also not liable for injunctive relief. The court also suggested that civil penalties even for more recent violations not barred by the statute of limitations could be very low, accruing only for the number of days during which the company began or possibly undertook the construction in question. Finally, the court joined other courts in holding that claims that the company violated Title V permitting regulations by omitting PSD requirements, which claims may not be raised in an enforcement case. The growing consensus also makes the Supreme Court unlikely to grant a request for review.
To read the entire Client Alert, click here.
Basel Committee and IOSCO Publish Policy Framework
[Editor’s note: The following post is authored by Goodwin Procter LLP.]
The Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) jointly issued a final policy framework (the “Policy Framework”) establishing minimum standards for margin requirements for non-centrally cleared derivatives. The Policy Framework is a result of a 2011 G20 agreement calling upon BCBS and IOSCO to develop, for consultation, global standards for margin requirements for non-centrally cleared derivatives; BCBS and IOSCO released two consultative versions prior to releasing the current final version of the Policy Framework.
The Policy Framework requires the exchange of both initial and variation margin between so-called “covered entities” that engage in non-centrally cleared derivatives. The document explains that margin requirements for such derivatives “would be expected” to reduce systematic risk by ensuring the availability of collateral to offset losses caused by a counterparty default, and would also promote central clearing by reducing the perceived cost benefits of engaging in uncleared derivatives transactions. The Policy Framework further explains that margin requirements have certain benefits over capital requirements, such as being allocated to individual transactions rather than being shared across an entity’s full range of activities. Margin is also, in the words of the document, “defaulter-pay” in the sense that the margin provided by the defaulting party is used to absorb the losses caused by the default, as opposed to capital’s “survivor-pay” model in which the non-defaulting party bears losses out of its own assets.
CFTC Adopts Final Harmonization Rules for Commodity Pool Operators
[Editor’s Note: The following post is authored by Davis Polk & Wardwell LLP.]
On August 13, 2013, the Commodity Futures Trading Commission (“CFTC”) adopted final regulations designed to harmonize the obligations of registered commodity pool operators (“CPOs”) under the CFTC Part 4. Regulations for commodity pools that are registered as investment companies (“RICs”) under the Investment Company Act of 1940 (“1940 Act”) with the obligations applicable to RICs under the 1940 Act and other securities laws. The final regulations also amend several Part 4 obligations as they apply to all registered CPOs with respect to all types of commodity pools.
In a significant departure from the harmonization rules proposed by the CFTC in February 2012, the final regulations adopt a “substituted compliance” framework that permits a registered CPO of a RIC to comply with the disclosure, reporting, and recordkeeping requirements applicable to the RIC under the Securities Act of 1933, the 1940 Act, and regulations of the Securities and Exchange Commission (“SEC”) in lieu of complying with many of the analogous Part 4 requirements that would otherwise apply to the registered CPO. Such substituted compliance is available under the final regulations for some, but not all, Part 4 requirements. Thus, while the harmonization rules provide important relief for registered CPOs of RICs with respect to most Part 4 compliance obligations, the rules do not address all requirements with which registered CPOs must comply. For example, the harmonization rules do not address requirements for registered CPOs under NFA bylaws. In addition, the harmonization rules do not affect the applicability of CFTC rules governing commodity interest trading activities, such as position limits or new swap regulatory requirements. Therefore, registered CPOs should carefully review their compliance programs in light of the harmonization rules to ensure they are meeting all applicable requirements.
To read the entire Client Memorandum, click here.
The Section 409A Valuation: Do You Really Need One?
[Editor’s Note: The following post is authored by Foley & Lardner LLP]
Yes. You do. That was easy. But perhaps we have gotten ahead of ourselves and we should start at the beginning of the story. While Section 409A is a tax provision, its genesis was the perceived abuse of deferred compensation arrangements by rapacious executives in the Enron and WorldCom debacles. Like the “golden parachute” rules of Section 280G, Section 409A is intended to work some good old-fashioned social engineering magic through the tax code. It was quite handy that these rules also made the IRS happy as Section 409A works in part by reigning in the ability of employees to “manipulate” or select the year in which they would have to recognize taxable income from various types of deferred compensation schemes. You see, the IRS does not like taxpayers to have any flexibility when it comes to the timing of recognition of income. Section 409A succeeded in achieving some of its narrow objectives but as is often the case, in ways that likely went well beyond the specific concerns that the statute was originally intended to address. The treatment of stock options under Section 409A is one of those unfortunate extensions. Regardless, we now have to live with these rules.