The 2012 Philomathia Foundation Forum: “Where is the Money? Unlocking Capital for Real Estate Efficiency Improvements.”

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

On Friday, October 5th, the Berkeley Center for Law, Business and the Economy is sponsoring the 2012 Philomathia Foundation Forum at the Ritz-Carlton in San Francisco. The topic of the Forum is “Where is the Money? Unlocking Capital for Real Estate Efficiency Improvements.” The event will take place from 8:30am-4:30pm.

The forum will explore what has been hindering the deployment of capital to energy efficient developments, including the need for energy considerations in risk and asset management decisions and a liquid secondary market for existing and proposed energy financing products.

Participants are encouraged to engage in an active discussion of the solutions to these impediments with leaders in real estate, finance, and technology.  The impressive speaker list includes Senator Ron Wyden (D-OR) and California Controller, John Chiang. Michael R. Peevey, President of the California Public Utilities Commission and Richard Kauffman, a Senior Advisor at the US Department of Energy will also present. These speakers and more will focus on assessing and managing the energy risk that is critical to unlocking the trillions of dollars necessary to achieve energy efficiency benefits.

The event is also sponsored by Manatt, Phelps & Phillips and the Fisher Center for Real Estate & Urban Economics and Haas School of Business at the University of California Berkeley.

If you would like more information, please contact BCBLE@law.berkeley.edu.

Banks and Industry Groups Continue to Question the Soundness of Volcker Rule

By Rebecca Kwan, J.D. Candidate 2014 | Posted on

The Volcker Rule, which bans banks from participating in proprietary trading, is still worrying bankers.  Financial industry groups are now focusing on an exemption from the rule that allows banks to make certain investments as a part of a legitimate liquidity management program. Regulators will have to distinguish between liquidity trading and proprietary trading. Unfortunately, liquidity trading and proprietary trading are not such discrete activities, making regulators’ jobs difficult, if not impossible.

Banks and industry groups argue that the exemption is so narrow that legitimate liquidity trades could be mistakenly labeled proprietary trades by regulators. In any case, bankers know that the narrower the exemption is, the more trading activity they will have to defend to regulators down the line. According to Berkeley Law Assistant Professor, Stavros Gadinis, “The more flexibility [banks] manage at this stage, the less negotiation they will have to do at a later stage, so this is where it’s at stake, where they can nip it in the bud.” Bankers have to be able to hedge to protect themselves, and the exemption is an attempt to allow that activity while prohibiting the kinds of risky trades that destabilize the market.

Regulators take the opposite view, arguing that the exemption is too broad, and that banks will easily disguise proprietary trading activities as liquidity trading. They worry that the exemption will function as a loophole and allow for risky whale-like trades. But the Volcker Rule, Gadinis said, “would not have stopped the [London] Whale trades. The question of what is a hedge is subject to interpretation. There are things that are definitely hedges, but there are things where it could be, but it’s doubtful.” (more…)

Firm Advice: Your Weekly Roundup

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on
  • On Tuesday, the Supreme Court granted cert in SEC v. Gabelli to decide when the federal five-year statute of limitations “accrues” in an action brought by the SEC. The court likely will resolve a lower court split between the Second and Fifth Circuits on whether the statute of limitations accrues when the alleged conduct occurs or when the government discovered the wrongdoing. Bingham has a full discussion of the case and its possible consequences in its recent Legal Alert.
  • The Basel III Framework’s proposed capital treatment of risk-weighted assets will cause banks to hold additional capital for many kinds of residential mortgages. Banks likely will pass along to borrowers the increased cost associated with higher capital requirements and/or reduce the availability of nontraditional mortgage products. Goodwin Proctor explains the details and consequences of this proposed approach in its recent Financial Services Alert.
  • Consistent with the SEC’s findings that retail investors prefer information in easy-to-read chart format, Joseph Wallin of Davis Wright Tremaine reminds us in a recent blog post of the differences between Rule 506 accredited investor offerings and crowdfunded offerings to be implemented under the JOBS Act.

Investor Standards in Rule 506 Offering v. Crowdfunding

SEC Studies Financial Literacy Among Investors

By Youna Kim, J.D. Candidate 2014 | Posted on

On August 30th, the Securities and Exchange Commission published a study regarding financial literacy among investors, as required by the Section 917 of the Dodd-Frank Act. In a 182 page report, the SEC examined 1) the existing level of financial literacy among retail investors; 2) methods to improve disclosures regarding financial intermediaries, investment products, and investment services, 3) information that retail investors need to make informed financial decisions, 4) methods to increase transparency of expenses and conflicts of interests, 5) existing efforts to educate investors, and 6) ways to increase investor financial literacy.

The study found that retail investors lack an understanding of basic financial concepts, such as diversification or the differences between stocks and bonds. Investors consider fees, investment strategies, and conflict of interest to be essential in their investment decisions and prefer clearly written disclosure documents that are easy to understand, with tables and graphs.

The study suggests that using the table format to explain fees and compensation is likely to = increase the transparency of expenses. The most effective existing efforts to educate investors were goal-oriented and research-based methods that are easily accessible to investors. In an effort to increase financial literacy of investors, the Office of Investor Education and Advocacy and organizations within the Financial Literacy and Education Commission will aim to create investor-specific programs, promoting the importance of checking the background and costs of investing.

While these findings may not be surprising, they come at a time when opportunities for retail investors are likely to expand through implementation of the JOBS Act, including both the SEC’s proposal to ease the general solicitation prohibition of private offerings and the JOBS Act’s  potential for relaxed regulations regarding crowdfunding.

Eminent Domain of Mortgage Securities: The Other Side

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

In our continuing coverage of Mortgage Resolution Partners’ (MRP) effort to facilitate local governments’ use of eminent domain to stem the mortgage crisis, today we present the other side—specifically, the comments submitted to the Federal Housing Finance Agency (FHFA) by the American Securitization Forum (ASF) on September 7.  The ASF is a professional forum with over 330 members, including issuers, investors, servicers, ratings agencies, and other professional organizations involved in securitization transactions.

We have previously described MRP’s plan here and here. In general, MRP is advocating that local governments use eminent domain to seize and restructure private-label underwater mortgages. These repackaged loans would ultimately be resold to investors with the value set at the current market value of the underlying property. This proposal has sparked controversy in terms of both its affect on the mortgage market and its constitutionality.  Not surprisingly, ASF argues that the plan will negatively impact the mortgage market and is unconstitutional.

[Update: Click through to read the rest of the article and a comment from Bill Falik challenging the accuracy of ASF’s statements]

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Corporate Law: Firm Advice

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

This is the first in a series of posts rounding up firms’ advice on corporate law.

  • California has a new private fund adviser exemption. The Dodd-Frank Act eliminated a similar federal exemption.  California has followed suit by limiting exemption from California’s “investment adviser registration requirements for advisers to only ‘qualified private funds.’”  What are “qualified private funds”?  Morrison & Foerster has the full update in their recent client alert.
  • How standardized should credit ratings be? Not much more than they already are, so says a recent SEC study prepared for Congress as part of the implementation of the Dodd-Frank Act.  Instead, the SEC suggests efforts would be better spent on increasing transparency of ratings methodologies and performance.  Goodwin Proctor has a full summary of the study in its financial services alert.
  • What’s your number? For a breakup fee in an M&A deal that is. The size of the deal and market precedent are a good place to start. But choosing an amount in advance that will comply with courts’ requirement that the amount not “be preclusive of a true superior proposal” can be difficult. Kirkland & Ellis has advice on picking your number.

Bill Falik Speaks About a Controversial New Plan to Fix the Mortgage Crisis

By Ana Amodaj, J.D. Candidate 2014, UC Berkeley School of Law | Posted on

On Thursday, September 6, Berkeley Law Adjunct Professor Bill Falik gave a presentation on his pioneering efforts to stabilize the mortgage market and prevent future foreclosures through the government’s use of eminent domain.

Having expertise in real estate, land use and development, Bill Falik started thinking about ways to stop the deterioration of the housing market after one of his housing developments in Roseville, CA was hit by a wave of foreclosures. “A group of us got together and started thinking about creative approaches to resolving the mortgage crisis and stopping foreclosures”, says Falik about the founding of Mortgage Resolution Partners (MRP), an organization seeking to implement this innovative strategy as a way to keep homeowners in their homes.

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Professor Howson Presents “Dangerous Liaisons: China’s Indirect Investment Structures and the Shaky Foundations of “China Plays” on the Global Capital Markets”

By jsantiesteban | Posted on

On Wednesday, September 12th, Professor Nicholas Howson will present “Dangerous Liaisons: China’s Indirect Investment Structures and the Shaky Foundations of “China Plays” on the Global Capital Markets.” The Berkeley Center for Law, Business and the Economy and the Center for Chinese Studies are cosponsoring the event. Lunch will be provided and CLE credit is available.

Professor Howson, visiting from the University of Michigan, will analyze the rise of “Variable Interest Entities,” an indirect method of investing in Chinese companies designed to circumvent Chinese government restrictions on foreign investment.  This investment form involves a foreign holding company creating a wholly owned subsidiary in China to effectuate the foreign company’s investment in a Chinese company.  The investment form, however, has proven risky for American investors.

Professor Howson will analyze the phenomenon as it has grown over nearly two decades, the way in which it underpins the great majority of apparently “Chinese” issuers raising money on the global capital markets, the very serious legal and financial risks arising from it, and several case studies where those risks have ripened into collapse or quasi-expropriation. Professor Howson will conclude with a discussion of the legal, professional and ethical obligations of corporate and securities lawyers and underwriters — Chinese and foreign — in connection with the structuring and facilitation of these transactions, and the introduction of such risk-laden issuers into the world’s capital markets.”

The event will take place in Boalt Hall, Room 110 at 12:45pm. Please RSVP to BCLBE@law.berkeley.edu.

SEC Proposes to Ease Access to Capital for Entrepreneurs, But Will It?

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

Earlier this year, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, a provision of which directed the SEC to relax regulations regarding general solicitation of private securities offerings. On Wednesday, August 29th, the SEC did just that, proposing to amend Rule 506 of Regulation D to allow general solicitation of private securities offerings, provided that all purchasers are accredited investors or investors whom the issuer reasonably believes are accredited investors.

The goal of the original legislation was to ease regulations faced by entrepreneurs seeking financing. Without the rule change, startups face limited options for funding. Their first option is a private placement in which the offering is made only to a limited number of accredited investors generally with whom the issuer already has a preexisting relationship. Section 502 of Regulation D currently prohibits marketing these investments to the public. Startups’ other option is a public offering (IPO). This option, however, requires registration with the SEC, which is often cost-prohibitive for many startups.

The rule change permits the general solicitation of private offerings provided that:

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Bill Falik Presents “Saving Homes, Saving Cities: Fixing the Mortgage Crisis Locally” on 9/6/12

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

On Thursday, September 6th, Berkeley Law Adjunct Professor Bill Falik will give a presentation on his work with Mortgage Resolution Partners (MRP), an organization advocating and seeking to fund local governments’ use of eminent domain to purchase underwater mortgages. The presentation is titled: Saving Homes, Saving Cities: Fixing the Mortgage Crisis Locally. The event will be held in Room 110 of UC Berkeley School of Law at 12:45 and is sponsored by the Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal. CLE credit is available and lunch will be provided.

Various cities across the country are considering the use of eminent domain to purchase underwater mortgages. Under the proposal, cities would use eminent domain to condemn the underwater mortgages (not the underlying property), at which point the city would purchase the loans for market value and refinance the loans to the homeowner at a principle balance equal to the current market value of the home.

This proposal has spawned predictions of dire consequences from members of the mortgage finance industry. Critics of the proposal argue that it is unconstitutional and would harm the mortgage market. Criticism has been so fierce as to prompt Lt. Governor of California Gavin Newsom to call on the Securities Industry and Financial Markets Association to stop threatening local officials in San Bernardino, a city considering the proposal.

Adjunct Professor Falik’s presentation will focus on MRP’s primary goal—to reduce the devastating health, safety, and welfare costs of underwater mortgages, foreclosures, and abandoned properties, leading to crime and blight, as well as depressed economic activity. He will argue that principal reduction is the most effective way to break the mortgage logjam that evicts families, decimates communities, paralyzes the banking system, and holds back economic recovery.

If you would like to attend the presentation, please RSVP to BCLBE@law.berkeley.edu