WASHINGTON A group of House Democrats is urging banking regulators to provide a limited exemption for some debt securities issued by collateralized loan obligations under the Volcker Rule.
The push comes after community banks won an exemption to the rule for collateralized debt obligations backed by trust-preferred securities to avoid millions of dollars in writedowns. Five banking agencies released guidance resolving that issue last month, while leaving unaddressed ongoing concerns over the treatment of CLOs.
At issue is the Volcker Rule's "ownership interest" provision and whether the right to vote on removing an investment manager should trigger ownership interest in a covered fund, which is prohibited under the rule. Some senior debt securities issued by CLOs include the right to remove the investment manager through a vote in the case of default, but also if there is a material breach of contract, fraud or criminal activity. If that constitutes ownership interest, some banks have warned that they would have to unload billions of dollars in CLO holdings before the rule goes into effect next year.
"While recognizing the need to prevent evasion of the final rule, we believe that the right to vote on removing an investment manager in traditional creditor-protective circumstances such as a material breach of contract should not, by itself, trigger an 'ownership interest,' " lawmakers said in the Feb. 12 letter. "Such a narrowly tailored interpretation will align the definition of 'ownership interest' with Congressional intent, while also guarding against evasion of ownership interests."
Seventeen lawmakers, including Rep. Maxine Waters, D-Calif., ranking member on the House Financial Services Committee, and a number of other members of the banking panel signed on to the letter.