CFTC Chairman Addresses European Parliament Committee on the Future of LIBOR

By Luke Burton, J.D. Candidate 2015 | October 5, 2012 at 08:58 am

On September 24, the Chairman of the CFTC, Gary Gensler, addressed the European Parliament Economic and Monetary Affairs Committee about the state of LIBOR. His comments came in the wake of the LIBOR scandal, initially revealed to the public in March 2011, and in advance of the Financial Services Authority’s recommendations on the future of LIBOR.

Chairman Gensler’s remarks included a call to look at the possibility of adopting alternate rates to replace LIBOR. His reasoning alluded to many of the same problems found in the emerging allegations of improper conduct against member banks. Gensler noted the banks lack “specific controls to prevent [them] from intentionally or unintentionally herding together and reporting the same or similar rates” and that banks have “inherent conflicts of interest” when submitting their own borrowing rates.

Governmental agencies in the US have been investigating the sixteen banks that set LIBOR for the US dollar since reports of the scandal began to surface last year. British bank Barclays has already paid a settlement of over $453 million to authorities in the US and UK.

(more…)

Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | October 4, 2012 at 08:40 am

Weil has published The 10b-5 Guide: A Survey of 2010-2011 Securities Fraud Litigation. The review crosses topics and circuits with updates on pleading standards, liability issues, and class action mechanisms. The survey also includes a preview of the upcoming Supreme Court term, including Amgen, a case considering whether plaintiffs in a securities fraud class action must prove materiality to invoke the fraud-on-the-market presumption.

Does an employee qualify as a SOX whistleblower if he sends his tip to the SEC via snail mail instead of one of the statutorily prescribed methods? On a motion to dismiss, Trans-Lux argued that he should not. A federal judge in the District of Connecticut disagreed and allowed the employee’s retaliation claim to proceed. Orrick has the details on their blog.

Last week, President Obama blocked a Chinese company’s purchase of a wind farm in Oregon citing national security concerns. The much-criticized decision was the first by a President in over twenty years. Skadden advises companies “to be aware that transactions that may not appear to be sensitive on their faces — such as the sale of a small wind farm — may indeed raise significant concerns within the CFIUS agencies and at the presidential level.” That, and more advice here.

Court Invalidates CFTC Position Limits Rule

By Rebecca Kwan, J.D. Candidate 2014 | October 3, 2012 at 09:41 am

On Friday September 29, Judge Wilkins for the U.S. District Court for the District of Columbia vacated a Dodd-Frank rule issued by the CFTC setting limits on the number of derivatives contracts that an individual trader or group of traders can own during a given period of time. The Court’s ruling turned on whether Dodd-Frank “clearly and unambiguously” mandated the creation of position limits on derivatives contracts with or without first determining whether those limits were necessary and appropriate.

Two trade groups brought suit, arguing that the correct interpretation of the statute requires a determination of necessity before setting position limits. The CFTC argued that there was no substantive necessity requirement at all. Both the trade groups and the CFTC argued that the statutory language was clear and unambiguous, and that their different interpretations were correct. (more…)

The Wheatley Review on LIBOR Releases Final Report

By Amanda Berloni, LLM Candidate 2013 | October 1, 2012 at 08:22 am

“We need reform not replacement.” – Guy Sears, Investment Management Association to the Financial Times on September 10, 2012

“Despite a long and painful recovery, sometimes replacement is the better choice when a hip or a knee or even a benchmark rate has worn out.” – Gary Gensler, Chairman, Commodity Futures Trading Commission quoted in the New York Times on September 24, 2012.

The Wheatley Review:

On Friday, the Financial Services Authority (the “FSA”) unveiled the findings of its study of the future of the London interbank lending rate (“LIBOR”). Martin Wheatley, Managing Director of the FSA and Chief Executive-designate of the Financial Conduct Authority, delivered a speech setting out the findings of the study and proposed recommendations on how the system should be reformed (the “Review”). (more…)

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

By Joseph Santiesteban, J.D. Candidate 2014 | September 28, 2012 at 03:40 pm

On Friday, October 5^th, 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 | September 28, 2012 at 12:09 pm

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 | September 27, 2012 at 02:56 pm

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 | September 26, 2012 at 03:34 pm

On August 30^th, 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 | September 21, 2012 at 11:27 am

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]

(more…)

Corporate Law: Firm Advice

By Joseph Santiesteban, J.D. Candidate 2014 | September 20, 2012 at 09:53 am

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.