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SEC Eases BDC Concerns Over Potential CLO Risk Retention Rules Conflict

September 13, 2018, 07:56 AM
Filed Under: Regulatory News

Business Development Companies (BDCs) that rely on Collateralized Loan Obligations (CLOs) as a part of their funding strategies can breathe a little easier after the Securities and Exchange Commission suggested it would not take enforcement action against the organizations for violating a conflict that arose out of the passage of the Dodd-Frank Act. 

As ABL Advisor reported in July, some experts had warned that as closed-end investment vehicles subject to guidance under the Investment Company Act of 1940, certain risk-retention rules put in place as part of the Dodd-Frank Act make it nearly impossible for BDCs issuing CLOs to follow both regulations.  

The clarification came in the form of a letter to Dechert, a law firm representing Golub Capital BDC and its affiliates. Sean Solis, a partner at Dechert, referred to the issue as " a material conflict between two regulatory regimes," in an interview with Reuters this summer. 

According to SEC Senior Counsel Rochelle Kauffman Plesset, the agency looked into the matter, including a request for relief from compliance with the Risk Retention Rules, and determined it was not needed at this time. 

"Based on the facts and representations set forth in your Letter, we would not recommend that the Commission take any enforcement action under Section 57(a) of the Act or Rule 17d-1 under the Act against the GC BDCs or the Adviser if they engage in the Proposed Transactions, as described in your Letter," Plesset wrote, adding that the viewpoint "represents our view on enforcement only and does not express any legal or interpretive conclusion on the issues presented. Any different facts or representations may require a different conclusion."

Lenders and Investment fund managers warned about the impact of risk retention rules under Dodd Frank on the CLO marklet long before they went into effect in December 2016, saying it would "dramatically shrink" the market for CLOs. In a 2013 survey published by Forbes, of 35 CLO managers that collectively manage $228 billion across 509 vehicles found that 22 of the 35 managers, or about 63%, could not, or would not, issue any new CLOs should the risk-retention rules take effect.


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