House Panel Holds Hearing on Legislation to Prevent Volcker Rule Divestiture of Legacy Debt Securities of CLOs

A hearing conducted by the House Capital Market subcommittee revealed tentative industry support for draft legislation clarifying that nothing in the Volcker Rule should be construed to require the divestiture of any debt securities of collateralized loan obligations, if such collateralized loan obligations were issued before December 31, 2013. At the same time, Rep. Carolyn Maloney (D-NY), the Subcommittee’s Ranking Member is concerned that the draft bill could create loopholes in the Volcker Rule, but she allowed that she could support a more narrowly tailored bill. Rep. Andy Barr (R-KY), the author of the draft legislation, 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. But Rep. Stephen Lynch (D-MA) said that the draft bill goes beyond the relief needed by completely exempting legacy CLOs. It is not necessary to grandfather all CLOs, said Rep. Lynch, and could even be dangerous by opening up the Volcker Rule to gaming by the industry. The discussion draft would also clarify that a banking entity will 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 banking entity 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 or trustees, investment manager, investment adviser, or commodity trading advisor of the fund, provided that the collateralized loan obligation is predominantly backed by loans.