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."
Mr. Barlas, a freelance writer based in Washington, D.C., covers topics inside the Beltway.