April 26, 2022 - On April 25th the LSTA submitted a comment letter in response to the SEC’s Notice of Proposed Rulemaking for Private Funds (the “Proposed Rule”). As we’ve previously noted, the Proposed Rule mainly targets private equity, hedge funds and venture capital funds but encompasses CLOs as well. If approved as proposed, it would impose additional reporting and disclosure requirements that would add significant unnecessary costs to CLOs, prohibit certain activities common to CLOs, and otherwise limit the ability of CLO managers to contract freely with investors. Moreover, as written, the Proposed Rule would apply to all existing as well as future CLOs. Given the extreme difficulty in amending CLO indentures, it would be extraordinarily difficult for most legacy CLOs to comply with the Proposed Rule, possibly leaving managers in an untenable situation.
The LSTA’s comment letter is divided into several sections. In the first part, we argue that CLOs should be exempted from the Proposed Rule because they are structured products that are already subject to strong governance, structural protections, and transparency requirements that effectively achieve (or exceed) the purported goals of the Proposed Rule. In the second part, we address the specific elements of the Proposed Rule and the specific issues they present for CLOs. We also recommend changes the SEC should make to the Proposed Rule if the SEC declines to exempt CLOs. Next, we explain why, in the event the SEC adopts final rules that apply to CLOs, the rules should be applied prospectively and not to existing CLOs which cannot reasonably be expected to amend their governing documents. We end the letter by describing our concerns regarding both the SEC’s statutory authority to adopt the Proposed Rules and whether, in proposing the rule, they performed an adequate cost-benefit analysis as required under the Administrative Procedure Act.
In addition to the comment letter itself, the LSTA provided a suite of educational materials to the SEC to help them understand the unique construction and requirements of CLOs. We provided a White Paper describing the CLO market in layman’s terms, part one of a two-part economic impact study (that analyzed whether the SEC’s economic analysis was sufficiently rigorous to meet the standards of the Office of Management and Budget), as well as redacted examples of trustee reports and indentures. In the coming days the LSTA publish (i) a markets-based review of its CLO White Paper and the Economic Impact Analysis, ii) a deeper dive into the comment letter itself, and (iii) a discussion of next steps. We encourage members to visit https://www.lsta.org/news-resources/ for updates.