Federal Reserve Extends Compliance Deadline for CLOs

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On April 7, the Federal Reserve Board (Board) announced that it intends to exercise its authority to give banking entities two additional one-year extensions to conform their ownership interests in, and sponsorship of, certain collateralized loan obligations (CLOs) covered by the Volcker rule. CLOs are securitization vehicles backed predominantly by commercial loans. The Volcker rule generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring or having certain relationships with a hedge fund or private equity fund. These prohibitions are subject to a number of statutory exemptions, restrictions and definitions.

“To ensure effective compliance,” the Board intends to grant banking entities two additional one-year extensions, which together would extend until July 21, 2017, to conform their ownership interests in and sponsorship of CLOs to the statute. Only CLOs in place as of December 31, 2013, that do not qualify for the exclusion in the final rule for loan securitizations would be eligible for the extension. The Board intends to act on these extensions in August of this year and the next year. A banking entity would not have to include ownership interests in CLOs to determine its investment limits under the final rule, and a banking entity would not be required to deduct CLO investments from tier 1 capital under the final rule until the end of the relevant conformance period.  

The decision was immediately criticized by certain members of Congress and banking trade organizations for not fixing the problem, which relates not to an extension of time but rather to whether Congress intended such instruments to be captured by the Volcker rule. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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