December 19, 2008
Volume 1 - Issue 4
TARP Update
Treasury Looks to Second Half of TARP
Editors:
Michael J. Missal
michael.missal@klgates.com
+1.202.778.9302
Matt T. Morley
matt.morley@klgates.com
+1.202.778.9850
Brian A. Ochs
brian.ochs@klgates.com
+1.202.778.9466
Mark D. Perlow
mark.perlow@klgates.com
+1.415.249.1070
Daniel F. C. Crowley, Karishma Shah Page
Treasury has committed the first $350 billion tranche of the $700 billion provided by
Congress for the Troubled Asset Relief Program (TARP), which was created by the
Emergency Economic Stabilization Act of 2008 (EESA). The remaining $350
billion is subject to Congressional disapproval by joint resolution enacted within 15
calendar days after Treasury certifies its intention to use those funds. Outgoing
Treasury Secretary Paulson has seemingly been reluctant to utilize this second
tranche of TARP funds because of considerable Legislative Branch resistance to the
Capital Purchase Program (CPP), as described below. However, after auto industry
bailout negotiations stalled in the Senate, it now appears that the White House and
Treasury may be assessing whether to commit additional TARP funds for a shortterm bridge loan in order to prevent a bankruptcy filing by a major domestic
automaker before President-elect Obama is inaugurated. There is speculation that
Congress may choose not to exercise its disapproval authority as part of a deal to
help the auto industry.
_________________________
In this issue:
• TARP Update
• OFAC and FinCEN
• Private Equity
• EU State Aid Rules
• UK Banking
• Insurance
Most of the first tranche of TARP funds was used to purchase preferred stock in
banking institutions, including as part of the massive Citigroup bailout (see
http://www.treasury.gov/press/releases/hp1287.htm). As the program has matured,
Treasury and the Federal Reserve have become increasingly inventive in addressing
the continuing credit market crisis. For example, on November 25, Treasury
allocated $20 billion in TARP funds to back a $200 billion Term Asset-Backed
Securities Loan Facility (TALF) established by the Federal Reserve to increase
liquidity in the consumer credit market. The underlying credit exposures of eligible
TALF securities initially must be newly or recently originated auto loans, student
loans, credit card loans or small business loans guaranteed by the U.S. Small
Business Administration. The facility may be expanded over time and eligible asset
classes may be expanded later to include other assets, such as commercial mortgagebacked securities, non-agency residential mortgage-backed securities or other asset
classes.
At a hearing on December 10, House Financial Services Committee Chairman
Barney Frank (D-MA) stated that Treasury should not request use of the second
tranche of TARP funds without addressing foreclosure mitigation and oversight
issues. Chairman Frank’s statement reflects mounting Legislative Branch criticisms
of Treasury’s implementation of TARP. The Government Accountability Office
released a report (http://www.gao.gov/products/GAO-09-161) on December 2
concluding that Treasury has yet to address critical oversight and compliance issues.
The Congressional Oversight Panel (COP), a TARP oversight panel created by
EESA, also released its first report on December 10, questioning Treasury’s strategy
and oversight. COP members include Chair Elizabeth Warren (Professor, Harvard
Law School), Congressman Jeb Hensarling (R-TX), Richard Neiman
(Superintendent of Banks, New York Banking Department), and Damon Silvers
Global Financial Markets
(Associate Counsel, AFL-CIO). Congress has held a
series of hearings on these matters, as well as
Treasury’s decision to abandon efforts to purchase
or guarantee troubled assets and instead focus on
equity injections into banking institutions (see the
previous issue of the Global Financial Markets
Newsletter).
Congress is considering measures to strengthen
oversight of TARP. On December 10, the Senate
passed S. 3731 (http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=110_cong_bills&docid=f:s3
731es.txt.pdf), the Special Inspector General for the
Troubled Asset Relief Program Act of 2008, by
unanimous consent. The bill clarifies that the
Special Inspector General (SIG) has the authority to
investigate all actions taken under EESA (including
the CPP); provides the SIG with temporary fasttrack hiring authority and funds to set up his office;
and requires Treasury to take actions to address
deficiencies identified by the SIG. The Senate
confirmed Neil Barofsky as the SIG on December 8.
Also on December 10, the House adopted an
amendment to the auto industry bailout bill, H.R.
7321 (http://frwebgate.access.gpo.gov/cgibin/getdoc.cgi?dbname=110_cong_bills&docid=f:h7
321eh.txt.pdf), to address the criticism that TARP
participants are not using funds to provide loans and
increase credit market liquidity. Adopted 403-0, the
amendment would require TARP participants to
report their lending activities quarterly. Both the
H.R. 7321 amendment and S. 3731, however, have
yet to be considered by the other chamber. With the
end of the session fast approaching, it is not clear
whether there will be further action on either
measure before Congress adjourns for the year.
Similar legislation may be reintroduced next year.
Other possible provisions could include directing
Treasury to require participating institutions to use
bailout funds to restart lending; or limitations on the
use of funds for acquisitions, dividends, or executive
compensation.
Chairman Frank has also indicated interest in
pursuing legislation that strengthens foreclosure
mitigation efforts. Such legislation could take
several forms. First, Congress could mandate that
Treasury purchase or guarantee troubled assets as it
initially contemplated in creating TARP. Second,
Congress could direct Treasury to allocate a portion
of the bailout funds to a loan modification and
guarantee program, such as the $24 billion program
recently proposed by the FDIC
(http://www.fdic.gov/consumers/loans/loanmod/ind
ex.html) to guarantee 2.2 million modified loans.
The FDIC plan would reduce mortgage payments to
31% of income, based on reductions in the
applicable interest rate, extension of the loan term,
and forbearance of principal. In exchange, servicers
would get $1,000 for each modification and the
government would share up to 50% of the re-default
loss. Third, Congress could expand the Hope for
Homeowners program (P.L. 110-289), under which
the original lender takes a write-down on the loan
and the borrower then refinances to a governmentbacked loan. Fourth, Congress could provide
mortgage-backed security servicers with the legal
authority to modify loans and indemnification from
investor lawsuits.
Finally, as anticipated in previous newsletters,
discussions continue on broader financial service
industry reforms. Notably, COP Chair Elizabeth
Warren recently called for the creation of a
Financial Product Safety Commission, akin to the
Consumer Product Safety Commission, that would
regulate financial services products. On November
14, the G-20 ministers agreed to begin work on a
coordinated response to the financial crisis. At
present, the ministers are developing specific
recommendations for the next summit, which is
scheduled for April 2009. The bipartisan
professionals in the K&L Gates Public Policy and
Law Group are monitoring all such proposals for the
benefit of firm clients.
______________________________
OFAC and FinCEN
OFAC Issues Guidance to
Securities and Futures Firms
Concerning Account Opening,
OFAC Requirements Are
Applicable to Everyone
Lawrence B. Patent
The Treasury Department’s Office of Foreign
Assets Control (OFAC) administers and enforces
economic and trade sanctions against targeted
foreign countries and designated persons. OFAC
December 19, 2008
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Global Financial Markets
issued guidance dated November 5, 2008, to assist
securities and futures firms in fulfilling their OFAC
obligations when accepting new clients and
evaluating client transactions
(http://www.treas.gov/offices/enforcement/ofac/artic
les/securities_future_accounts_11052008.pdf).
OFAC’s guidance applies to investment advisers
(IAs), securities broker-dealers (BDs), futures
commission merchants (FCMs), introducing brokers
in commodity interests, commodity pool operators
(CPOs) and commodity trading advisors (CTAs).
OFAC’s guidance is important in three areas:
OFAC Account Opening Requirements
•
Although another arm of the Treasury
Department, the Financial Crimes Enforcement
Network (FinCEN), recently withdrew as
outdated proposals published in 2002 and 2003
that would have required IAs, CPOs, CTAs and
hedge funds to establish anti-money laundering
(AML) programs under the Bank Secrecy Act
(BSA), OFAC’s guidance notes that all U.S.
persons, including securities and futures
firms, are subject to the requirements of
OFAC.
•
OFAC, unlike FinCEN’s approach under the
BSA, requires that a BD or an FCM look
through the intermediary to the underlying
beneficial owners of an omnibus account for
purposes of complying with OFAC
requirements.
•
FinCEN about duplicative regulation, and OFAC,
unlike FinCEN, does not accept the concept that
different intermediaries perform certain roles in
financial market transactions that should permit
delegation of responsibility. Despite OFAC’s
statement that “[a] strong OFAC compliance
program [will be] similar to . . . a brokerage firm’s
Customer Identification Program,” in fact OFAC
expects more of BDs and FCMs where omnibus
accounts and certain other intermediaries are
involved than does FinCEN.
Although FinCEN permits clearing firms and
introducing or executing firms to rely upon each
other for performing certain AML functions,
OFAC’s guidance states that it does not
permit businesses to reallocate their legal
liability to a third party with regard to
statutes that OFAC administers – thus, if a
securities or futures firm delegates OFAC
compliance functions to others, the securities or
futures firm, as well as the third party, could be
held liable for any OFAC violations caused by
the third party’s negligence.
OFAC’s guidance, which was issued almost
immediately after FinCEN withdrew its outdated
AML proposals, appears designed to remind all
financial intermediaries of their obligations under
OFAC, which is certainly a less well-known
regulatory program compared to the AML programs
administered by FinCEN. The OFAC guidance also
makes clear that OFAC has less concern than
A new customer’s identity should be verified before
an account is opened or within a reasonable time
period after account opening. Securities and futures
firms should screen the new customer against
OFAC’s Specially Designated Nationals and
Blocked Persons list, known as the SDN list and
accessible at
http://www.treas.gov/offices/enforcement/ofac/sdn/i
ndex.shtml, and applicable OFAC sanctions
programs. OFAC advises that firms should use
risk-based factors to assess risks posed by each
customer and transaction, asking questions such as:
•
Is the customer regulated by a federal
functional regulator, widely known, or listed on
an exchange?
•
Has the firm had any previous experience with
the customer or does it have prior knowledge
about the customer?
•
Is the firm facilitating a U.S. person’s
investment in a foreign issuer or other company
that conducts business in a sanctioned country?
•
Is the customer located in a high-risk foreign
jurisdiction that is considered to be poorly
regulated or in a known offshore banking or
secrecy haven?
•
Is the customer located or does it maintain
accounts in countries where local privacy laws,
regulations, or provisions prevent or limit the
collection of client identification or beneficial
ownership information?
Periodic checks of “non-accountholders,” such as
beneficiaries, guarantors or principals, may also be
necessary, depending upon each firm’s specific risk
profile.
December 19, 2008
3
Global Financial Markets
Documenting OFAC Compliance
Securities and futures firms should maintain
adequate documentation of the results of their
screening against the SDN list and applicable OFAC
sanctions programs. In the event of a potential
OFAC violation, both the adequacy of a company’s
transaction processing system and its overall OFAC
compliance program are taken into consideration
when determining the severity of possible
enforcement action.
FinCEN Withdrawal of Proposed
AML Rules for IAs, CPOs, CTAs and
Hedge Funds
As noted above, in late October FinCEN withdrew
rules proposed over five years ago that would have
required IAs, CPOs, CTAs and hedge funds to adopt
AML programs. In issuing these withdrawal
notices, FinCEN noted that it would not adopt such
rules in the future without providing interested
parties an additional opportunity to comment upon
proposals. FinCEN’s withdrawal appears to be
based on the principle that AML programs for IAs,
CPOs, CTAs and hedge funds are not necessary
because their customer accounts are carried by and
their transactions are executed through other
financial institutions, BDs and FCMs that do have
AML programs. FinCEN noted that it has
concluded major rulemakings concerning BSA
compliance by BDs and FCMs since it proposed the
now-withdrawn proposals related to IAs, CPOs,
CTAs and hedge funds that have confirmed the
adequacy of their AML protections. OFAC’s
guidance also focuses more upon the responsibility
of BDs and FCMs and does not permit those entities
to avoid liability under OFAC programs by pointing
to introducing firms or firms engaged only in the
transaction-execution process.
______________________________
Private Equity
Private Equity Funds, Illiquidity
and the “Denominator Effect”
Ricardo J. Hollingsworth, John W. Kaufmann
Historically, the ranks of institutional investors in
private equity funds have been dominated by a
relatively small number of public and private
pension plans, foundations and endowments. The
vast majority of their institutional counterparts were
content to invest their assets in public securities,
usually through third-party investment managers.
After realizing that the best-performing private
equity funds provide risk-adjusted returns that
significantly exceeded those that were being
obtained in the public markets, a broader group of
institutional investors came to embrace alternative
investments generally, and private equity
specifically, as integral parts of a diversified
portfolio. This led to a significant expansion in the
number of institutional investors seeking to invest in
private equity and a period of unprecedented growth
in the asset class. In 2007, private equity funds
raised almost $500 billion.
The turmoil in the credit markets and its attendant
effects on both the public securities markets and the
private equity market have strained the private
equity portfolios of institutional investors in two
respects—portfolio allocations and liquidity. As a
result of the recent declines in value of institutional
investors’ public equity holdings, their proportional
holdings in private equity and other illiquid
investments in many cases are higher than originally
targeted. This “denominator effect,” so named
because the decrease in the value of public equity
holdings causes a decrease in the value of the
investor’s overall portfolio (the “denominator”),
which in turn causes the private equity portion of
the portfolio (the “numerator”) to account for a
disproportionately large part of the overall portfolio,
causes over-allocation to the private equity asset
class. The problem has been exacerbated by the fact
that valuations of private equity investments, given
their illiquid nature, have trailed declining
valuations in the public equities markets. While this
will be ameliorated to some degree by the
implementation of FAS 157 on January 1, 2009,
which essentially will require private equity firms to
mark their assets to market, certain institutional
investors have decided to begin rebalancing their
portfolios in order to bring their private equity
allocations within range of their original allocation
targets. This is one reason why several very large
university endowments have reportedly been
considering selling parts of their private equity
portfolios in the secondary market and others have
reportedly refused to meet capital calls.
December 19, 2008
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Global Financial Markets
Liquidity concerns are also affecting institutional
investors in private equity. The frozen credit
markets have prevented private equity firms from
liquidating investments in their portfolio companies
through leveraged recapitalizations, sales to strategic
buyers or public offerings. This has slowed the
distributions that private equity firms are making to
their investors. Emerging as we are from an
unprecedented period of private equity fund raising,
many institutional investors have concluded that the
expected payouts from their existing private equity
investments may not even be enough to meet their
commitments to invest in the new private equity
funds to which they have recently committed. This
decrease in liquidity, which is made more severe by
the drop in the value of the liquid, public equity
portions of their portfolios, is adding to the pressure
on endowments trying to fund university operating
expenses and pension funds facing ever-increasing
benefit obligations.
Taken together, the “denominator effect” and the
decrease in liquidity could lead many institutional
investors to reduce their investments in private
equity funds, which potentially signals a period of
consolidation or even contraction for the private
equity industry.
______________________________
EU State Aid Rules
Squaring the Circle: EU State Aid
Rules and the Banking Bailout
Vanessa C. Edwards
When asked his opinion of investing in the 1920s
stock market bubble, Andrew Mellon, Treasury
Secretary from 1921 to 1932 (to Presidents Harding,
Coolidge and Hoover), replied "Gentlemen prefer
bonds." In the wake of another, more recent bubble,
some European governments prefer equity, and in
the last three months have put hundreds of billions
of euros into recapitalising their banks. Other
governments have preferred to provide guarantees to
their financial sectors. How can these measures be
squared with the basic prohibition of State aid in the
European Union?
In the European context, State aid is defined as an
advantage in any form whatsoever conferred on a
selective basis to undertakings by national public
authorities. The EC Treaty provides that State aid
which distorts or threatens to distort competition by
favouring certain undertakings or the production of
certain goods is, insofar as it affects trade between
Member States, incompatible with the common
market. The Treaty recognises, however, that in
some circumstances interventions by the State can
be justified; it accordingly provides that aid with
certain policy objectives may be considered to be
compatible with the common market.
Normally, a Member State proposing to provide
such aid must provide advance notice to the
European Commission, which has exclusive
responsibility for determining whether aid is lawful,
and await the Commission's approval before
granting the aid. Since the beginning of October,
the Commission has validated over 20 national
schemes supporting financial stability, including
guarantee schemes (Denmark, Finland, France,
Ireland, the Netherlands, Portugal, Slovenia and
Sweden), asset purchase schemes (Spain) and
recapitalisation schemes (sectoral schemes in
Germany, Greece and the UK, and specific bank
schemes in France, the Netherlands and Sweden).
For a full list, see
http://europa.eu/rapid/pressReleasesAction.do?refer
ence=MEMO/08/766&format=HTML&aged=0&la
nguage=EN&guiLanguage=en. While by law the
Commission may take up to two months to make an
initial determination on such requests, the European
Council has noted the need for rapid and flexible
action in the current economic circumstances.
Among the categories of assistance that may be
regarded as lawful is aid to facilitate the
development of certain economic activities. On the
basis of that exemption, the Commission issued a
Communication in 2004 (http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CEL
EX:52004XC1001(01):EN:NOT; Community
guidelines on State aid for rescuing and
restructuring firms in difficulty) setting conditions
for both rescue aid and restructuring aid. In recent
months, as the global financial crisis unfurled and
its scale became apparent, the Commission
recognised that those guidelines, which had been
framed in a different context, would not be
adequate. It accordingly issued a fresh
Communication on 13 October 2008
(http://europa.eu/rapid/pressReleasesAction.do?refe
December 19, 2008
5
Global Financial Markets
rence=IP/08/1495&format=HTML&aged=0&langua
ge=EN&guiLanguage=en; The application of State
aid rules to measures taken in relation to financial
institutions in the context of the current global
financial crisis) in which it acknowledged that, in
light of the level of seriousness of the current crisis
in the financial markets and of its possible impact on
the overall economy of Member States, aid measures
undertaken to address the crisis may be justified on
the separate ground, hitherto rarely invoked and
strictly interpreted, of aid to remedy a serious
disturbance in the economy of a Member State. It is
under this heading that Member States have sought
approval of their various schemes to support the
financial services sector.
In the October Communication, the Commission
recognised that recapitalisation schemes are one of
the key measures that Member States can take to
preserve the stability and proper functioning of
financial markets. On the basis of the general
principles laid down in the Communication,
recapitalisation schemes were authorised subject to
the introduction of market-oriented remuneration
rates, appropriate behavioural safeguards and regular
review. In the rapidly unfolding crisis, however,
both Member States and potential beneficiary
institutions called for more detailed guidance, and
on 5 December 2008 the Commission issued a
further Communication
(http://europa.eu/rapid/pressReleasesAction.do?refer
ence=IP/08/1901&format=HTML&aged=0&langua
ge=EN&guiLanguage=en; The recapitalisation of
financial institutions in the current financial crisis:
limitation of aid to the minimum necessary and
safeguards against undue distortions of
competition).
The December Communication provides that state
interventions must be both proportionate and
temporary. The Communication notes that, in
evaluating any proposed recapitalisation scheme or
measure, the Commission will balance the
anticipated benefits against three potential forms of
competitive harm that might occur, by considering
the following principles:
•
Recapitalisation by one Member State of its own
banks should not give those banks an undue
competitive advantage over banks in other
Member States;
•
Recapitalisation schemes that are open to all
banks within a Member State without
differentiating on the basis of risk profile
should not give an undue advantage to
distressed or less well-performing banks; and
•
Public recapitalisation, and in particular the
costs that banks must pay to take advantage of
public funding, should not put banks that seek
additional capital on the market in a
significantly less competitive position.
The Communication also provides detailed
guidance on the principles which the Commission
will take into account in its assessment of specific
types of assistance plans.
•
In assessing temporary recapitalisations of
fundamentally sound banks in order to foster
financial stability, the Commission will focus
on entry and exit strategies: remuneration
(reflecting the methodology for benchmarking
the pricing of State recapitalisation measures
for fundamentally sound institutions in the Euro
area proposed by the European Central Bank in
its Recommendation of 20 November 2008) and
incentives for State capital redemption, together
with the need for review after six months.
•
In assessing lending to the non-banking sector
and for rescue recapitalisations of other banks,
unsurprisingly the Commission will impose
stricter requirements for remuneration and more
stringent behavioural safeguards, such as a
restrictive policy on dividends (including a ban
during the restructuring period), limitation of
executive remuneration or the distribution of
bonuses, an obligation to restore and maintain
an increased level of the solvency ratio
compatible with the objective of financial
stability, and a timetable for redemption of
State participation.
It remains to be seen how these latest guidelines
will be implemented in practice in connection with
future requests for approval by Member States.
______________________________
UK Banking
UK Banking Stabilisation
Measures 2008
December 19, 2008
6
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Claudia Harrison, Katie Hillier
1. Introduction
At the start of 2008, few people predicted the
dramatic financial events of the past year.
Governments have rallied to stabilise financial
systems which have been severely shaken and
remain wary of further possible aftershocks. This
article considers the stabilisation measures already
implemented by the British government and the draft
legislation for a permanent statutory regime to deal
with failing banks.
2. Measures already implemented
2.1 Special Liquidity Scheme ("SLS")
The Bank of England (the "BoE") summarises the
SLS as a scheme enabling banks "to swap
temporarily assets that are currently illiquid in
exchange for UK treasury bills". In fact, the BoE
lends treasury bills in return for security over
'swapped' assets. It is limited by eligibility
restrictions for both institutions (only those eligible
to subscribe to BoE standing facilities) and assets
(only those backed by residential mortgages or credit
card debt). Despite these limitations, it has proved
so popular that both its availability period and its
value have been extended.
A key feature of the SLS is that the risk associated
with the 'swapped' assets remains with participants.
The public sector would only be exposed if a bank
failed to return its treasury bills at maturity and the
value of the assets it had pledged as security fell
short of the value of the bills borrowed. The use of a
margin or 'haircut', intended to ensure that the value
of security assets is always greater than the value of
the bills, reduces this risk.
2.2 Bank Recapitalisation Fund ("BRF")
The government has made available up to £50bn for
equity share capital investments in certain UK
banks. The overriding objective of the BRF is to
ensure that banks maintain capital positions which
support market confidence in them. The foundations
of such confidence include banks having sufficient
capital to absorb losses and to continue normal
commercial lending. So far, Lloyds TSB, Halifax
Bank of Scotland and Royal Bank of Scotland are
participating in the BRF. Others intend to increase
capital through normal commercial measures.
Naturally, banks wish to minimise any government
shareholding to ensure independence and avoid the
stigma of public ownership. However, if the poor
uptake of RBS's recent share placing is any
indication, the amount needed from the government
may be higher than anticipated. Predictions suggest
that the banking system may need capital
investment of at least £100bn before confidence in it
recovers.
2.3 Credit Guarantee Scheme
This scheme aims to encourage wholesale lending
by issuing government guarantees in respect of
certain debt instruments issued by eligible
institutions. In theory, if a bank is backed by a
government guarantee, other banks will be less
reluctant to lend to it. Wholesale funds will start to
move more readily and LIBOR will fall as
confidence between banks is restored. However,
the scheme's eligibility conditions, both for
participants and instruments, limit its scope so that
it may only boost confidence in institutions least in
need of such support.
3. Permanent Statutory Regime
3.1 Banking Bill 2008 (the "Bill")
The Bill, published in October, is the government's
proposal introducing for the first time a permanent
statutory regime for dealing with troubled banks.
This replaces emergency legislation passed earlier
this year, which expires in February 2009. It
proposes a 'Special Resolution Regime', conferring
various powers upon the tripartite authorities - the
UK government, Financial Services Authority (the
"FSA") and BoE. These powers include three
'stabilisation options' (to be used to rescue a failing
bank), a bank insolvency procedure ("BIP") and a
bank administration procedure ("BAP").
(a) Stabilisation options
These options restate and reinforce the
authorities' powers under the emergency
legislation. They are triggered if a bank
fails to meet the conditions of its FSA
authorisation (normally because of a
failure to maintain adequate resources to
conduct its business, in the FSA's
opinion). The options are to transfer all
or part of the shares or business of a
failing bank to either (i) a private sector
purchaser, (ii) a 'bridge bank' (a BoE
December 19, 2008
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Global Financial Markets
subsidiary), or (iii) temporary public
ownership.
(b) BIP and BAP
The FSA already has statutory authority to
apply for an administration order or
petition for the winding up of a bank. The
Bill extends this power so that, where
certain conditions are met, any of the
authorities can apply for a failing bank to
be placed in BIP and the BoE can apply
for a failing bank to be placed in BAP.
These procedures follow the same
structure as existing insolvency and
administration regimes, with different
'officeholders' objectives. Ordinarily, a
liquidator's objective is to realise an
insolvent company's assets for distribution
to creditors. A bank liquidator's primary
objective is to ensure that eligible
depositors receive compensation speedily
or have accounts transferred to an
alternative institution. Similarly, an
administrator has three objectives, in order
of priority: first to rescue the company as
a going concern, secondly to achieve a
better result for the company's creditors as
a whole than would be likely if the
company were wound up, or, if neither of
the first two are possible, to realise assets
to make distributions to secured creditors.
In contrast, BAP will be used to oversee
the operation of the 'residue' of any bank,
following a partial property transfer under
the stabilisation options referred to above.
Consequently, a bank administrator's
primary objective is to facilitate such
transfer to the bridge bank or private
purchaser.
is an inevitable consequence of the failure of
large financial institutions, and that stability
will only be protected by tighter regulation
which reduces the inherent risk of such failure.
A consultation document on regulation
regarding liquidity risk management and
supervision is expected from the FSA in 2009.
Critics suggest that the FSA's measures and the
Bill should be developed concurrently.
•
The Bill's stabilising effect is limited because it
does not apply to foreign or investment banks,
two categories with a significant impact on
market conditions.
•
In the context of a partial property transfer, the
transferee may be able to 'cherry pick' the
highest quality assets, disproportionately
reducing assets available for residual creditors
and undermining rights of set-off against other
transactions with the same counterparty. Any
such interference in creditors' rights or the
ability to override contractual provisions could
seriously damage confidence in UK financial
markets and in particular London's
competitiveness as an international financial
centre. The government is consulting on
secondary legislation to address this issue.
•
There could be problems regarding
transparency in how the authorities' powers are
used. For example, it is proposed that the BoE
should no longer have to disclose details of its
emergency lending operations. The aim is to
prevent the media-fuelled panic which occurs
when news of a bank's financial difficulties
breaks. However, it could lead to a more
general sense of uncertainty as opposed to
instability concentrated around the institutions
which are the source of it.
______________________________
3.2 Comment
In general the Bill has been welcomed, but there is
widespread concern about certain of its provisions.
This has led to calls for more consultation time to
ensure that haste does not lead to measures which,
instead of improving stability in financial markets,
actually undermine it further.
• The Bill is primarily designed to limit the
instability caused by failing banks by
establishing an orderly regime for dealing with
them. However, some consider that instability
Insurance
Claims Notification: Don’t Give
Insurers an Excuse Not to Pay
Sarah Turpin, Jane Harte-Lovelace
The credit crunch has already given rise to
numerous third party claims against financial
institutions in the US, primarily by disgruntled
investors and shareholders. While the "tsunami" of
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Global Financial Markets
litigation predicted by many lawyers has not yet
arrived in the UK, the collapse of Lehman Brothers
and the scandal involving Bernard Madoff's $50
billion Ponzi scheme raises the prospect of similar
claims (and related investigations) emerging. In
these circumstances, companies are well advised to
consider the state of their insurance coverage,
particularly under Professional Indemnity/Errors &
Omissions and Directors & Officers' Liability
policies. In particular, companies should pay close
attention to the importance of well-drafted claims
notification provisions in their insurance policies.
Companies should also be alert to the need for
prompt notification to their insurers in the event of a
claim or circumstances that may give rise to a claim.
Below is a checklist of some practical points to
consider in connection with insurance placed in the
London market and governed by English law,
although many of the points have equal application
in other jurisdictions, particularly the US.
• Check the policy provisions relating to claims
notification and consider whether there is any
scope for improvement. The English Court of
Appeal recently criticised the claims notification
provisions in a Professional Indemnity policy as
"a patchwork of provisions, which have no
doubt been largely drawn from other policies
but do not all fit well together".
•
•
Make sure that any notice of claims and of
circumstances is given in a timely manner. The
notice provision will normally stipulate the
period within which notice has to be given and
this can vary from a specified time period to
"immediately" or "as soon as practicable".
Failure to comply could prove fatal if the clause
is a condition precedent to the insurer's liability
under the policy.
Don't assume that the absence of the words
"condition precedent" means that the notice
provision will not be construed as such. Harsh
as it may seem, the English (and US) courts may
hold that the requirement to give valid notice is
a condition precedent even though not described
as such in the policy. English courts may allow
insurers to deny liability for breach of a
condition precedent, even if they have not
suffered any prejudice as a result. The position
is similar in the US where, in contrast to
comprehensive general liability policies, some
US courts have not required an insurer to
demonstrate any prejudice resulting from
untimely notice under a claims-made policy.
•
Set up and maintain proper internal lines of
communication to ensure early identification of
any errors or problems which may require
notification. This is especially relevant to
businesses with global operations, particularly
those based in jurisdictions where less
importance is placed on the need for early
notification. In these circumstances, it may
prove particularly beneficial to limit the
requirement to notify to those claims or
circumstances which are known to the group
risk manager or general counsel.
•
Make sure the notice of any circumstance is
sufficiently detailed. Some policies require
detailed particulars to be given, including the
identity of any potential claimants and the types
of claim anticipated. The insurer may seek to
deny cover if it considers that inadequate details
have been given.
•
Make sure the notice of any circumstance is
sufficiently broad to cover all potential claims
regarded as real risks. The policy will usually
contain a “deeming” provision to the effect that
any claim arising from a circumstance notified
to insurers will be deemed to have been made
within the policy period. However, if the notice
is not sufficiently broad and additional claims
materialise which have no causal connection
with the circumstance originally notified, then
the deeming provision may not apply and the
policy will not respond.
•
Don't be economical with the truth! A
preliminary notice couched in vague terms —
perhaps to avoid the prospect of higher
premiums at renewal — may be held
inadequate for claims notification purposes.
There is, however, a balance to be drawn
between being too vague and too specific: a
notification which is too specific may enable
insurers to limit their liability if the claim
expands into something much wider than
suggested in the original notification.
•
If the matter is subject to further investigation
and/or dependent upon future developments,
make this clear and update the notification as
further information comes to light.
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Global Financial Markets
•
Review and update the notification prior to
renewal.
•
Make sure notification is given to all insurers
(including Lloyd's Underwriters and CoInsurers). The policy will normally provide an
address where notices must be sent. Some
policies provide for notice to be sent to a broker
or solicitor but, unless they are authorised by the
insurers to act as their agents for claims
notification purposes, they merely act as a
conduit, and it is vital to ensure that the notice is
actually received by the relevant insurers.
Notice to the broker or solicitor may not in itself
be sufficient.
Whatever the jurisdiction, but certainly in England
and the US, it is vital that policyholders take a
proactive approach to claims notification. Early
advice both prior to and at the time of notification
could prove invaluable.
Make sure notification is also given to any
excess layer insurers, where there is any
possibility that the claim will impact on those
layers. The excess layer policies may not
necessarily have the same notice provisions as
the primary layer, and notice to the primary
layer insurers alone is unlikely to be sufficient.
This could prove catastrophic for high-value
This publication/newsletter is for informational
purposes and does not contain or convey legal
advice. The information herein should not be used
or relied upon in regard to any particular facts or
circumstances without first consulting a lawyer.
•
claims where the excess layer insurance may
prove essential.
Please contact Jane Harte-Lovelace (020 7360 8280
or jane.harte-lovelace@klgates.com) or Sarah
Turpin (020 7360 8285 or
sarah.turpin@klgates.com) if you would like further
information.
______________________________
K&L Gates comprises approximately 1,700 lawyers in 29 offices located in North America, Europe and Asia, and represents capital markets
participants, entrepreneurs, growth and middle market companies, leading FORTUNE 100 and FTSE 100 global corporations and public sector
entities. For more information, please visit www.klgates.com.
K&L Gates comprises multiple affiliated partnerships: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and
maintaining offices throughout the U.S., in Berlin, in Beijing (K&L Gates LLP Beijing Representative Office), and in Shanghai (K&L Gates LLP
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and Paris offices; a Taiwan general partnership (K&L Gates) which practices from our Taipei office; and a Hong Kong general partnership (K&L
Gates, Solicitors) which practices from our Hong Kong office. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices
are located. A list of the partners in each entity is available for inspection at any K&L Gates office.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2009 K&L Gates LLP. All Rights Reserved.
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