Regulatory Vacancies Hindering Relief from Agency Rules

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The senior loan industry has plenty of avenues available to remedy its complaints that risk retention and other Dodd-Frank regulations could potentially hinder the CLO market.

But these routes have long odds of resulting in the modification or repeal of rules that collateralized loan obligation managers and investors want – despite the friendly overtures from Capitol Hill and the White House over scaling back regulation.

At a panel discussion Thursday during a CLO and leveraged-loan investor conference, three former banking and capital markets regulators – including former U.S. comptroller Eugene Ludwig – joined with industry voices in expressing doubts that any changes will occur soon.

Among the factors is the logjam any Dodd-Frank changes would face in Congress due to the 60-vote Senate threshold to overcome Democratic objections. But also discussed at the investors conference is the Trump administration’s slow pace in making political appointments to the financial industry regulatory bodies.

“There is no doubt a tone and a desire for regulatory moderation,” said Ludwig, the Clinton-era comptroller as well as co-founder of regulatory consultancy Promontory Financial Group.  “On the other hand, to get things done you still have to have the heads of the agencies” as well as professional staff appointed to potentially rewrite any of the guidelines that the agencies have authority to enforce.

More than 60% of attendees at the conference, hosted by the Information Management Network at The Conrad in New York, agreed there were “low odds” of fixing any of the financial regulations in question (which also include the leveraged-lending guidance and the Volcker Rule prohibition on proprietary trading – the latter of which means CLOs are limited from holding high-yield bond assets).

This despite an overwhelming majority (over 70% in another poll question) who considered it critical to repeal or modify regulations promulgated from the Dodd-Frank Act that were applied to collateralized loan obligations, including risk-retention standards and the Volcker rule ban on proprietary trading by a regulated bank.

The pessimism abounds despite “palpably different” approach the new Trump administration plans to bring to financial regulations, said conference panelist Travis Norton, a former staff counsel on the U.S. House Financial Services committee who is now a Policy Advisor at Brownstein Hyatt Farber Schreck.

That is, in large measure, due to the vacancies in federal supervisory roles. The only confirmed head of any agency appointed by Trump is the Security and Exchange Commission chairman Jay Clayton. The Office of the Comptroller of the Currency has only an acting comptroller in Keith Noreika, who is an interim appointment for Trump.

The president has not formally nominated acting Commodity Futures Trading Commission chairman J. Christopher Giancarlo until March, nor his reported favorite for the Federal Reserve’s vice chair of supervision position: Randal Quarles, a former Treasury executive in both Bush administrations who also worked for The Carlyle Group.

Ludwig referred to the banking supervisory vacancies as “the big empty space” in Trump’s plans to re-work financial services regulation.

Legal challenges are also a potential approach, but the LSTA has been unsuccessful in direct challenges in federal court to the “skin in the game” risk-retention regulations on CLOs. Its “clear” that Trump and Clayton “want to turn [regulation] toward capital formation,” ahead of other duties including investor protections and oversight of “orderly” markets, said panelist Norm Champ, a partner at Kirkland & Ellis and a former director of investment management at the SEC. 

The LSTA has already sought Treasury Secretary Steven Mnuchin’s help in getting the SEC to use its rule-making authority to grant CLOs an exemption to risk retention standards under Clayton.

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