While 2014 might have been a lighter year for the Americas' structured products markets in terms of regulatory and compliance issues, compared to the previous two years, there was still plenty to keep Wall Street lawyers busy - and few were busier than Davis Polk.
The law firm advised on more than 3,400 deals in 2014, including more than $25 billion worth of issuance, and counts among its clients many of the largest structured products issuers in the US.
Described by its clients as "top-notch" and with "few, if any, rivals", Davis Polk was also praised by dealers for the strength of its staffing, which, they say, has enabled them to outsource more compliance, helping to reduce costs in business areas that can be high volume but offer low margins.
For many dealers, Davis Polk remains the counsel of choice for advice on complex products distribution. "We use them for algorithmic indexes - products where it's difficult to describe the material in terms of risk and relate it so it's understandable to non-mathematicians. They're one of the few firms to have the depth of knowledge to advise on that," says a senior structured products executive at one large US bank.
But it is the strength in depth of Davis Polk's regulatory advisory practice, both US and internationally focused, that really makes it stand out from its peers. One of the major areas for the structured products team in 2014 was the likely impact of the Financial Stability Board's proposed rules on total loss-absorbing capacity (TLAC) and its subsequent effect on structured notes issuance.
The original TLAC proposal by the regulators had structured products excluded from loss-absorbing capacity debt. That raised very high-level concerns the day it came out
"The original TLAC proposal by the regulators had structured products excluded from loss-absorbing capacity debt. That raised very high-level concerns the day it came out," recalls Warren Motley, partner at Davis Polk's New York office.
The law firm's senior partners, Randall Guynn in particular, worked prominently on two collaborative comment letters on the TLAC proposals, which were submitted in February 2015. One was from various industry bodies, including The Clearing House Association and the Securities Industry and Financial Markets Association, and focused on the interests of US banks. The other was a joint comment letter submitted by the Institute of International Finance and the Global Financial Markets Association, and concentrated on issues common to US and European banks.
"Randy advised the committees on both the American and international side, and was a regular participant in the calls. I think, absent him at that level, there wouldn't have been a focused, concentrated way for the structured product issuers in Europe and the US to get their concerns aired in that comment process," says Motley.
While the comment process is still ongoing in TLAC, some US banks have enlisted Davis Polk to prepare them for any changes to their structured notes and products business, based on the law firm's experience in Europe, where it helped several issuers on inserting additional language around bail-ins on structured product documentation.
"That transition hasn't come to US banks yet, but it has to European banks entering that market. Because of our experience in London with these bail-in features over the last six months, we were able to get a jump on that," says Christopher Schell, partner in Davis Polk's New York office.
One senior in-house counsel at a US bank attests to the quality of the law firm's advice: "This isn't a concept that US banks have had to really focus on, and it's not clear yet whether it's a priority for the Federal Reserve either, but we've been working with Davis Polk to find an approach we're hopeful will withstand TLAC when it finally comes around."
On the domestic regulatory front, Davis Polk has been busy with an overhaul from the Securities and Exchange Commission (SEC) on estimated value disclosures on exchange-traded notes. The firm represented five issuers affected by the commission's 2014 guidance, steering them through the process of changing their prospectuses.
"The main theme the SEC focused on was to make sure investors understood the difference between the indicative value of a note on any day, which is calculated by the issuers, and the trading price. The idea was to make them aware that when we talk about indicative value, that's something you can get if you redeem your securities. But if you go into your market to sell a smaller amount, you're not necessarily going to get that indicative value; it could be selling at a premium or some deduction from the indicative value," says Motley.
Open architecture distribution - where banks open up their platforms to other issuers - has also become an area of focus for US dealers, particularly as regulatory oversight required by the Financial Industry Regulatory Authority on sales practices has become more onerous, says Schell.
The firm has helped several banks to address the legal maze surrounding the topic. "Open architecture has resulted in new contractual arrangements between various issuers and distributors to sell the products, and we've been quite involved in the negotiations for those arrangements," he says. "You need to have more specialised provisions that address the regulatory issues."