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Comptrolling the Volcker Rule: Good for CLOs?

August 8, 2017 - Last week the Office of the Comptroller of the Currency (“OCC”), one of the three main banking regulators involved in the promulgation of the final Volcker Rule regulations issued under Section 619 of Dodd Frank, published a notice soliciting public comment on “whether certain aspects of the implementing regulation should be revised to better accomplish the purposes” of the underlying statute.  Why should we care?  While the Volcker Rule regulations did not materially impact the loan market, very expansive (and, arguably, overreaching) interpretations by the regulators of the meanings of the terms “ownership interests” of “covered funds” resulted in the prohibition on banks from purchasing any debt obligations issued by CLOs that were not comprised solely of loans and cash equivalents.  Because of Volcker, no longer could CLOs include small baskets for bonds or other securities.  The OCC’s notice, which specifically identifies these two definitions, could potentially open a path toward revising those interpretations, once again allowing CLO managers to include some bonds in their portfolios. 

The agency specifically requested input on ways to tailor the rules’ requirements to clarify key provisions that define prohibited and permissible activities and how the federal agencies could implement the existing rule more effectively without revising the regulation.  The OCC’s notice focuses on three aspects of the Volcker Rule, only the last of which impacts CLOs. First, the agency seeks input on the scope of the entities subject to the rule, wondering whether small banks that do not engage in the behaviors targeted by the rule should be included.  Second, they ask for comments on the prohibition on banks from proprietary trading (which, importantly, do not affect loans).  Finally, they ask whether the definition of covered funds is too expansive.  The Volcker Rule was meant to prohibit banks from owning private equity and hedge funds but goes far beyond that to include, e.g., securitizations like CLOs.  In that context the OCC asks whether additional guidance can help distinguish more clearly between permissible and impermissible activities, specifically asking whether the rule should be revised to clarify how the definition of “ownership interest”, intended to cover equity securities but which now includes virtually all debt securities as well, applies to securitizations.  Market participants have 45 days to submit comments.  The LSTA, which submitted a comment letter to Treasury Secretary Mnuchin  on the issue of ownership interests earlier this year, expects to submit a letter to the OCC as well.  MoFo has published a helpful memo on the OCC’s solicitation of input.

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