Developments of Note

• U.S. Supreme Court Upholds Limited Interpretation of RESPA
• CFTC Approves Final Rule Regarding Core Principles for Designated Contract Markets
• FSOC Issues Procedures for Hearings in Connection with Proposed Determinations that Certain Non-Bank Financial Companies and Financial Market Utilities are Systemically Important

DEVELOPMENTS OF NOTE

U.S. Supreme Court Upholds Limited Interpretation of RESPA

The United States Supreme Court ruled this week that 12 U.S.C. § 2607(b), a section of the Real Estate Settlement Procedures Act, applies only to fees shared between two or more settlement service providers, and does not provide a cause of action for borrowers seeking to challenge the collection of fees by lenders. The borrowers had obtained mortgage loans from the defendant and later filed suit alleging that the defendant violated § 2607(b) by charging them fees for which no services were provided, specifically, a loan discount fee. The defendant argued successfully in the lower courts that § 2607(b) does not apply to the collection of fees agreed upon between borrowers and lenders unless the fee was impermissibly split among two or more settlement service providers. Since the loan discount fee was agreed with the borrower and retained by the defendant, the fee was not within the reach of the statute.

The Supreme Court unanimously affirmed the judgment for the defendant and rejected the plaintiffs' interpretation of the statute, holding that § 2607(b) "unambiguously covers only a settlement-service provider's splitting of a fee with one or more persons." Of equal significance, the Court also affirmatively held that § 2607(b) does not reach a single provider's alleged retention of an unearned fee, and thus does not provide a means for a borrower to challenge a lender's fee on grounds that such fee was "unreasonably high." The Supreme Court's ruling represents a major victory for the mortgage industry; lenders and settlement service providers have faced many lawsuits in recent years that will no longer be viable as a result of this decision. Click here for a copy of the Supreme Court's opinion. The defendant was represented by Goodwin Procter's Tom Hefferon.

CFTC Approves Final Rule Regarding Core Principles for Designated Contract Markets

The CFTC unanimously approved a final rule regarding "Core Principles and Other Requirements for Designated Contract Markets." A number of Core Principles were embodied in the Commodity Exchange Act prior to the Dodd-Frank Act. The Dodd-Frank Act, however, amended the Commodity Exchange Act by, among other things, amending most of the pre-existing Core Principles, adding five new Core Principles, and requiring all Designated Contract Markets ("DCMs") to demonstrate compliance with each Core Principle as a condition of obtaining and maintaining designation as such.

As amended by the Dodd-Frank Act, the Commodity Exchange Act now includes 23 Core Principles, which apply to all swaps, futures, and options listed on a DCM unless otherwise specified by the final rule. The CFTC's final rule release includes rules, guidance, and "acceptable practices" pertaining to the Core Principles. According to the rules release, the CFTC generally adopted rules in circumstances in which a standard industry practice has developed, while offering guidance and acceptable practices in other circumstances. This approach is intended to mandate certain requirements while offering DCMs flexibility to establish compliance regimes tailored to their specific markets and business models.

A brief overview of the 23 Core Principles follows:

• Core Principle 1 ("Designation as Contract Market") requires DCMs to comply with the Core Principles and CFTC regulations.
• Core Principle 2 ("Compliance with Rules") requires DCMs to establish, monitor, and enforce compliance with rules pertaining to, among other things, access requirements, terms and conditions of contracts traded on the DCM, and prohibitions on abusive trade practices.
• Core Principle 3 ("Contracts Not Readily Subject to Manipulation") requires DCMs to list only contracts that are not "readily susceptible" to manipulation.
• Core Principle 4 ("Prevention of Market Disruption") requires DCMs to develop and follow procedures to prevent manipulation, price distortion, and disruptions of the delivery or cash-settlement process.
• Core Principle 5 ("Position Limitations or Accountability") requires DCMs to adopt position limitations for each contract that trades on the DCM.
• Core Principle 6 ("Emergency Authority") requires DCMs to adopt rules to provide for the exercise of emergency authority, including the authority to liquidate or transfer open positions in any contract, to suspend or curtail trading in any contract, and to require special margin requirements.
• Core Principle 7 ("Availability of General Information") requires DCMs to make available to the public certain information concerning the DCM's rules and regulations, contracts, and operations.
• Core Principle 8 ("Daily Publication of Trading Information") requires DCMs to make available to the public daily information on settlement prices, volume, open interest, and opening and closing ranges for actively traded contracts on the DCM.
• Core Principle 9 ("Execution of Transactions") requires DCMs to provide "a competitive, open, and efficient market and mechanism for executing transactions that protects the price discovery process of trading in the centralized market of the" DCM. The CFTC's proposed rule pertaining to Core Principle 9 proved to be controversial, attracted considerable attention from commentators, and was opposed by some members of the Commission. Aside from including the statutory language required by the Dodd-Frank Act, the final rules omitted rules and guidance pertaining to Core Principle 9, which will be separately considered in a future rule-making.
• Core Principle 10 ("Trade Information") requires DCMs to record and retain audit trail data for all transactions taking place over the DCM.
• Core Principle 11 ("Financial Integrity of Transactions") requires DCMs to establish and enforce rules and procedures for ensuring the financial integrity of transactions entered into on or through the DCM. It also requires DCMs to establish and enforce rules to ensure the financial integrity of futures commission merchants and introducing brokers as well as the protection of customer funds.
• Core Principle 12 ("Protection of Markets and Market Participants") requires DCMs to establish and enforce rules to protect markets and market participants from abusive practices committed by any party (including those acting as an agent for a participant) and to promote fair and equitable trading on the DCM.
• Core Principle 13 ("Disciplinary Procedures") requires DCMs to establish and enforce disciplinary procedures allowing them to discipline, suspend, or expel market participants and members that violate the DCM's rules.
• Core Principle 14 ("Dispute Resolution") requires DCMs to establish and enforce rules regarding customer dispute resolution procedures.
• Core Principle 15 ("Governance Fitness Standards") requires DCMs to establish and enforce appropriate fitness standards for directors, members of any disciplinary committee, members of the DCM, and any other person with direct access to the facility. This core principle will be the subject of further rule-making.
• Core Principle 16 ("Conflicts of Interest") requires DCMs to establish and enforce rules to minimize conflicts of interest in its decision-making process and to establish a process for resolving such conflicts of interest. This core principle will be the subject of further rule-making.
• Core Principle 17 ("Composition of Governing Boards of Contract Markets") requires DCMs to design their governing arrangements to permit consideration of the views of market participants. This core principle will be the subject of further rule-making.
• Core Principle 18 ("Recordkeeping") requires DCMs to maintain records of all activities related to their business as contract markets, in a form and manner acceptable to the CFTC, for at least five years.
• Core Principle 19 ("Antitrust Considerations") prohibits DCMs from (1) adopting any rule or taking any action that results in any unreasonable restraint of trade and (2) imposing any material anticompetitive burden on trading.
• Core Principle 20 ("System Safeguards") requires DCMs to establish and maintain a risk oversight program and emergency and disaster recovery procedures.
• Core Principle 21 ("Financial Resources") requires DCMs to have adequate financial, operational, and managerial resources. Financial resources are considered "adequate" if the value of the financial resources exceeds the DCM's operating costs for a one-year period.
• Core Principle 22 ("Diversity of Boards of Directors") requires that publicly traded DCM's must endeavor to recruit individuals to serve on their board of directors from among a broad and culturally diverse pool of qualified candidates. This core principle will be the subject of further rule-making.
• Core Principle 23 ("Securities and Exchange Commission") requires DCMs to keep records relating to security-based swaps open to inspection and examination by the SEC.

As noted above, much of the final rule's content was already reflected in existing law or regulation. One CFTC commissioner characterized the final rule as imposing "relatively modest changes" to the DCM governance regime.

CFTC Chairman Gary Gensler has directed the CFTC staff to continue accepting public comments on Core Principle 9, which was not finalized in the rules release, as the staff continues to work on the rules underlying that core principle.

The final rule will become effective 60 days after its forthcoming publication in the Federal Register. DCMs will be required to comply with most of the requirements 60 days thereafter.

FSOC Issues Procedures for Hearings in Connection with Proposed Determinations that Certain Non-Bank Financial Companies and Financial Market Utilities are Systemically Important

The Dodd-Frank Act authorizes the Financial Stability Oversight Council (the "FSOC") to require a non-bank financial company or financial market utility to be subject to prudential standards and to supervision by certain federal agencies if the FSOC determines that distress at or the failure of such nonbank financial company or financial market utility could pose a threat to the financial stability of the United States. We previously discussed the criteria and procedures for use by the FSOC in indentifying systemically important non-bank financial companies in the April 10, 2012 Financial Services Alert and the process for designating systemically important financial market utilities in the July 26, 2011 Financial Services Alert. On May 22, 2012, the FSOC issued a notice of availability of and a request for comments on procedures governing hearings (the "Hearing Procedures") to be conducted by the FSOC in connection with such proposed determinations and emergency waivers or modifications made pursuant to Titles I (non-bank financial companies) and VIII (financial market utilities and payment, clearing or settlement activities) of the Dodd-Frank Act.

Among other things, the Hearing Procedures provide that a request for a written or oral hearing (the latter of which may be granted at the FSOC's discretion) be in writing, that the petitioner submit a written memorandum setting forth the reasons, legal and factual, for contesting the proposed determination or emergency waiver or modification by the FSOC and that the materials or information submitted or obtained in the course of a hearing are confidential, subject to the FSOC's rule implementing the Freedom of Information Act. The Hearing Procedures note that failure to make a timely request for a hearing will waive the petitioner's right to a hearing and that the FSOC may dismiss a hearing upon the request of the petitioner or if the petitioner fails to timely submit written materials.

Comments are due 60 days after publication in the Federal Register.

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2012 Goodwin Procter LLP. All rights reserved.

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