May 2014
Federal agencies are mulling over changes to the final Volcker Rule, published by five federal agencies on December 10, 2013. A key issue is whether banks will be forced to sell collateralized loan obligation (CLO) debt securities because they are considered subject to the rule's ban on proprietary trading by banks. At hearings in the House Financial Services Committee in February, top committee Republicans complained that the final rule would allow U.S. banking subsidiaries of foreign bank holding companies to trade in debt of Spanish and Greek companies and cities but U.S. banks could not trade in certain kinds of U.S. corporate debt. "Congress never intended that CLOs be covered in the first place," says Rep. Scott Garrett (R-NJ), chairman of the House Capital Markets and Government Sponsored Enterprises subcommittee.
In a letter to financial
regulatory agencies on December 24, 2013, five U.S. financial associations
pleaded for guidance that would say CLOs are not an "ownership
interest" under the final rule, and therefore exempt from the ban on
proprietary trading. If that clarification is not forthcoming, the letter said,
" Divestment of CLO debt securities will
unnecessarily disrupt the CLO market, could result in immediate and substantial
capital losses for banking entities, and will ultimately impair the
availability of, and increase the cost of, corporate lending since banking
entities play a significant role in providing continued liquidity to the CLO
debt market and CLOs provide significant capital and liquidity to the corporate
loan market."
Martin Gruenberg, chairman
of the Federal Deposit Insurance Corporation, told members of the House
Financial Services Committee in February that a working group formed by the
agencies after the final Volcker Rule was published "would review and
consider" the complaints about the Volcker's negative impact on corporate
borrowing stemming from the inclusion of CLOs in the proprietary trading ban.
The other four agencies responsible for authoring the Volcker
Rule are the Federal Deposit Insurance
Corporation, Comptroller of the Currency, Commodity Futures Trading Commission
and Securities and Exchange Commission.
Carol Danko, vice president,
public affairs for SIFMA, one of the trade groups pressing for a CLO exemption,
says the federal financial regulators had not made a decision as of the end of
March. Currently, CLOs provide
$280 billion of credit to non-investment grade corporate borrowers, roughly 45
percent of funded non-investment grade term loans to U.S. companies, according
to the Loan Syndications and Trading
Association.
Financial Reporting an Issue in Proposed
Reg A Changes
Current
Regulation A allows issuers to make unregistered public offerings of up to $5
million in a 12-month period. The financial statements that must be included in
current Regulation A offering circulars do not have to be audited, and there
are no ongoing reporting obligations under the Securities Exchange Act of 1934.
Securities sold through this method are not restricted securities, but are
subject to state registration and qualification requirements.
The SEC issued a proposed
rule on December 2013 which creates a new Tier II under Regulation A for
filings under $50 million, per the congressional directive. The big question
now is what kind of reports will companies have to file under Tier II. Quaadman
says there should be a broad exemption plus a second exemption for compliance
with the eXtensible Business Reporting Language (XBRL) requirements. In the
first instance, the Chamber is particularly worried about the possibility that
once a Regulation a issuer crosses either the500
non-accredited investors or 2,000 total investors threshold under section 12(g)
it would become subject to all the reporting requirements under the Exchange
Act.
"We believe that if an
exemption were not granted to Regulation A issuers under Section 12(g), it is
likely that Tier 2 offerings would become less attractive, and issuers would be
incentivized to either restrict their Regulation A offerings to accredited
investors, or pursue a private offering under Regulation D," explains
Quaadman. "Such an outcome would be contrary to the intent of the JOBS
Act, and would inhibit capital formation in our economy."
Author bio:
Mr. Barlas, a freelance writer based in Washington, D.C., covers topics inside the Beltway.
