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From Securities Regulation Daily, March 14, 2014

House panel approves legislation preventing Volcker Rule divestiture of legacy debt securities of CLOs

By Jim Hamilton, J.D., LL.M.

The House Financial Services Committee marked up and approved legislation clarifying that nothing in the Volcker Rule should be construed to require the divestiture, prior to July 21, 2017, of any debt securities of collateralized loan obligations (CLOs), if such debt securities were issued before January 31, 2014. The vote to approve was 53 to 3. Introduced by Rep. Andy Barr (R-Ky.), the Restoring Proven Financing for American Employers Act, H.R. 4167, would amend the Volcker Rule to exclude certain debt securities of CLOs from the prohibition against acquiring or retaining an ownership interest in a hedge fund or private equity fund.

Representative Barr, a key member of the House Financial Services Committee, said that the legacy debt securities of CLOs must be protected from the medicine that the Volcker Rule prescribes. In his view, this medicine would be far more damaging to the credit markets than the perceived illness of suffering losses from CLO paper. Congress must grandfather existing CLO investments, emphasized Rep. Barr.

The legislation would also clarify that a financial institution would not be considered to have an ownership interest in a CLO if there is no indicia of ownership other than the right of the firm to fire or remove for cause, or to participate in the selection or removal of, a general partner, managing member, member of the board of directors, investment manager, investment adviser, or commodity trading advisor of the fund, provided that the CLO is predominantly backed by loans.

H.R. 4167 provides that an investment manager or investment adviser must be deemed to be removed for cause if the investment manager or adviser is removed as a result of a breach of a material term of the management or advisory agreement or the agreement governing the CLO; the inability of the investment manager or adviser to continue to perform its contractual obligations or any other action or inaction by the investment manager or investment adviser that has or could reasonably be expected to have a materially adverse effect on the CLO, if the manager or adviser fails to cure or take reasonable steps to cure such effect within a reasonable time.

An amendment offered by Rep. Carolyn Maloney (D-N.Y.), and approved by voice vote, added, as a removal for cause, a removal for a comparable event that threatens or could reasonably be expected to threaten the interests of the holders of the debt securities.

Chamber of Commerce. The bill is supported by the U.S. Chamber of Commerce. Tom Quaadman, vice president of the Center for Capital Markets Competitiveness, said that the Chamber believes that it is proper to correct the defect of the Volcker Rule by aligning the definition of ownership interests to CLOs that existed as of December 31, 2013. The Chamber said that the Barr legislation would prevent the fire sale of existing CLOs that harm the financial institutions that hold them and depress the existing markets, thereby harming new CLO issuances.

In addition, the Chamber believes that the passage of the legislation would allow the regulators the time to fix the potential adverse impacts of the Volcker Rule upon Main Street businesses. The Chamber also urged Congress to include in the legislation a requirement that a comprehensive study of Dodd-Frank rules be conducted to understand better the interaction of various regulatory initiatives and their impacts upon Main Street businesses.

Structured Finance Industry Group. The Structured Finance Industry Group believes that H.R. 4167 encapsulates the intent of lawmakers through the Dodd-Frank Act itself, as well as the intent recently expressed by lawmakers of both parties on the Financial Services Committee. The group views the bill as another helpful tool to work together to create a well-regulated and liquid CLO marketplace.

Companies: U.S. Chamber of Commerce; The Structured Finance Industry Group

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