Sunday, March 16, 2014

House Panel Approves Legislation Preventing Volcker Rule Divestiture of Legacy Debt Securities of CLOs

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, if such debt securities were issued before January 31, 2014. The vote to approve was 53-3. 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 collateralized loan obligations from the prohibition against acquiring or retaining an ownership interest in a hedge fund or private equity fund.

Rep. Barr, a key member of the House Financial Services Committee, said that the legacy debt securities of collateralized loan obligations must be protected from the medicine that the Volcker Rule prescribes, which in his view would be far more damaging to the credit markets than the perceived illness of suffering loses 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 collateralized loan obligation 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 collateralized loan obligation 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 collateralized loan obligation; 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 collateralized loan obligation, 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-NY), 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.

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