Bram Smith, the executive director of the Loan Syndications and Trading Association (LSTA), yesterday testified before a congressional subcommittee, arguing against proposed rules that would require CLO managers to retain a 5% interest in their funds.

“Attempting to apply the risk retention rules to CLOs is like trying to fit a square peg into a round hole. They simply don’t fit,” Smith told the House Subcommittee on Capital Markets. “The proposal, as currently drafted, would have a profoundly negative impact on CLOs – indeed, it could basically end CLO formation entirely.”

The Federal Deposit Insurance Corp. announced its proposed regulations the last week of March, lumping CLOs in with other structured vehicles. The LSTA hopes it can work with lawmakers to create a more nuanced rule that would be appropriate for CLOs. The LSTA has already met with more than 20 lawmakers, as well as the Securities and Exchange Commission, the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency.

“Since CLOs are a major lender to U.S. companies, this action could significantly reduce lending to American corporations and impact their ability to expand and create jobs,” Smith said.

The purpose of the risk retention rule, Smith said, was to address issues related to originate-to-distribute asset-backed securitizations. CLOs, Smith stressed, are not these types of securitizations. He added that CLO managers have a fiduciary responsibility to actively manage the portfolio of loans and that managers fees are paid only after investors have received interest payments from the CLO, ensuring the managers interest is aligned with investors.

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