July 15, 2020 - As we noted recently, the federal banking agencies together with the SEC and the CFTC recently published a final rule on the “Covered Funds” portion of the Volcker Rule.  For CLOs and the loan market, the result was very positive:  Under the final rule, U.S. banks will be permitted to purchase and hold CLO debt securities even if the underlying CLO includes non-loan assets in its portfolio.  Moreover, banks and CLO managers also obtained relief from restrictions that would have been much more impactful (perhaps even existential) in a potential scenario in which loans were characterized as securities.  But is this the end of the story?  The answer is far from clear.  Depending on the results of the coming elections, the new Volcker Rule might be subject to invalidation under the Congressional Review Act (“CRA”)

What is the CRA? The CRA (5 U.S.C. § 801 et seq.), was enacted in 1996 to “creat[e] a special mechanism for Congress to review new rules issued by federal agencies … before they go into effect and to disapprove any rule to which Congress objects.” The CRA establishes expedited procedures under which the House and Senate can jointly disapprove, and thereby invalidate, agency rules.

How often is the CRA used?  In the early days of the Trump administration, sixteen rules were overturned under the CRA.  In reality, the CRA is likely to be used only after an election where the presidency changes parties and the new president’s party also maintains a majority in both the House and Senate.

How does the CRA work? Under the CRA, before an agency rule can go into effect, it must be submitted to Congress for review. The CRA process is fairly complex, but in broad strokes, Congress has a limited time period to initiate disapproval of a rule under the CRA, starting from the date that is the later of (i) when the agency submits the rule to Congress and (ii) publication of the rule in the Federal Register. Members of Congress can initiate the process by submitting a joint resolution of disapproval within the time limit. The CRA provides certain expedited procedures for Senate consideration, which in practice include treating motions to consider a disapproval resolution as not subject to filibuster. To successfully invalidate a rule under the CRA, both houses of Congress must pass an identical joint resolution of disapproval, which is then submitted to the President for signature. Disapproval under the CRA applies only to rules in their entirety; Congress cannot designate certain parts of a rule for invalidation while leaving the rest of the rule in place. If a rule is disapproved, it is treated as though it had never been issued (and, in the case of the Volcker Rule, the previous rule would continue to govern).

When does the clock run out on the ability to invoke the CRA?  The rules around timing are very complex.  A petition for disapproval in the Senate must be initiated within 60 “session days” after the rule is published or presented to Congress.  The Senate then has 60 session days to disapprove the rule on an expedited basis (no filibuster permitted and only 10 hours of debate).  What constitutes a “session day” is very confusing and difficult to predict, particularly during the coronavirus pandemic.  Importantly, there is also a “lookback” provision that starts the clock again.  Thus, if 60 session days don’t occur during the remainder of this Congress, the clock for invalidating the rule starts over in the next Congress. In the new session, the reset periods would begin on the 15th day of session in the Senate and the 15th legislative day in the House.

Is there interest in invalidating the new Volcker Rule?  It is too early to tell.  Importantly, the new rule included many changes impacting asset classes other than CLOs.  Perhaps most visibly, the new rule now permits banks to invest in venture capital funds and credit funds.  These changes could provide more motivation for Democrats to invoke the CRA but, because the rule must be considered in its entirety, action on VC and credit funds would also invalidate the changes affecting CLOs.  On the other hand, a Democratic Congress may focus on other, unrelated, regulations that have priority over the Volcker Rule.

LSTA Advocacy.  The LSTA has been engaged with federal regulators on the Volcker Rule since its inception and was very engaged in the agencies’ re-proposal of the rule.  We are gratified that the agencies accepted our position on CLOs and revised the Volcker Rule accordingly.  We will continue to closely monitor developments in Congress and engage as necessary.  Please consider joining the Business Loans Coalition to follow and support our advocacy efforts on this matter and others.

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