March 23, 2022 - As we’ve previously reported, the SEC’s recently proposed rule on private funds could significantly impact the CLO market and the market is taking notice.  This week, LSTA General Counsel Elliot Ganz spoke with Asset Backed Report about some of the biggest challenges presented by the proposed rule.   Mr. Ganz noted that while the SEC targeted private-equity and hedge funds advisers, CLOs are technically covered under the rule as well.  Indeed, the 341-page proposal mentions private equity and hedge funds 82 and 79 times, respectively, but CLOs not once and “securitized funds” in only one small section of the cost-benefits analysis.

The proposed rule would require a significant amount of additional quarterly disclosure on top of the already very robust amount of information already distributed to CLO investors under current practice.  It would also require audited annual financial statements, which are not required now and would be of dubious value.  Mr. Ganz explained that one of the most problematic aspects of the rule is that it does not provide for “grandfathering” already existing CLOs.  This would expose the 2000 or so legacy CLOs to extensive new reporting requirements and additional costs that have not been bargained for, would be very disruptive and could lead to redemptions of many of those CLOs.  He pointed out that CLOs are “notoriously difficult to amend” especially where new costs would have to be allocated and certain indenture provisions would have to be changed.

The LSTA is hard at work on a comment letter for submission to the SEC which is due thirty days after publication of the proposed rule.