[Congressional Bills 114th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4166 Introduced in House (IH)]
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114th CONGRESS
1st Session
H. R. 4166
To amend the Securities Exchange Act of 1934 to provide specific credit
risk retention requirements to certain qualifying collateralized loan
obligations.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
December 3, 2015
Mr. Barr (for himself and Mr. David Scott of Georgia) introduced the
following bill; which was referred to the Committee on Financial
Services
_______________________________________________________________________
A BILL
To amend the Securities Exchange Act of 1934 to provide specific credit
risk retention requirements to certain qualifying collateralized loan
obligations.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Expanding Proven Financing for
American Employers Act''.
SEC. 2. RISK RETENTION REQUIREMENT FOR QUALIFIED COLLATERALIZED LOAN
OBLIGATIONS.
Section 15G(e) of the Securities Exchange Act of 1934 (15 U.S.C.
780-11(e)) is amended by inserting after paragraph 6 the following new
paragraphs:
``(7) Requirements for qualified collateralized loan
obligations.--
``(A) Risk retention requirement.--Notwithstanding
any other provision of this section, as of the
effective date set forth in subsection (i)(2), the risk
retention requirement for qualified collateralized loan
obligations may be met by the purchase and, during the
applicable duration of risk retention specified by the
rules of the Federal banking agencies under subsection
(c)(1)(C)(ii), holding (without hedging or otherwise
transferring the credit risk), of no less than five
percent of the equity of the collateralized loan
obligation by the manager of the qualified
collateralized loan obligation or one or more of the
majority-owned affiliates of the manager or its
knowledgeable employees and other employees.
``(B) Qualified collateralized loan obligations.--
For purposes of this paragraph, a qualified
collateralized loan obligation is a collateralized loan
obligation that meets all of the following
requirements:
``(i) Asset quality protections.--The
collateralized loan obligation shall--
``(I) have at least 90 percent of
its assets comprised of senior secured
loans and cash equivalents;
``(II) have 100 percent of its loan
assets issued by companies;
``(III) have no assets that are
asset-backed securities or derivatives,
except that this limitation shall not
prohibit a qualified collateralized
loan obligation from acquiring a loan
participation or any interest related
to or in a letter of credit, or
entering into derivative transactions
to hedge interest rate or currency rate
mismatches;
``(IV) not purchase assets in
default, margin stock, or equity
convertible securities;
``(V) acquire only loans held or
acquired by three or more investors or
lenders unaffiliated with the manager;
``(VI) hold only loans to borrowers
whose financial statements are subject
to an annual audit from an independent,
accredited accounting firm;
``(VII) have no more than 60
percent of its assets comprised of
covenant lite loans; and
``(VIII) at the time of purchase of
any asset, comply with the requirements
of subclauses (I) and (VII) and clause
(ii) of this subparagraph, or, if not
in compliance with any such
requirement, maintain or improve the
level of compliance after giving effect
to such purchase.
``(ii) Asset portfolio protections.--
``(I) No more than 3.5 percent of
the assets of the collateralized loan
obligation may relate to any single
borrower.
``(II) No more than 15 percent of
the assets of the collateralized loan
obligation may relate to any single
industry.
``(iii) Structural protections.--
``(I) The collateralized loan
obligation's equity shall be at least 8
percent of the value of its assets.
``(II) The governing transaction
documents of the collateralized loan
obligation specify over-
collateralization and interest coverage
tests, and if any such test falls below
the required level specified for the
collateralized loan obligation in such
documents, available interest
collections (and if necessary,
available principal collections) must
be applied to repay the collateralized
loan obligation's debt in order of
seniority until compliance with the
applicable test is restored.
``(iv) Requirement to maintain alignment of
manager and investor interests.--
``(I) The collateralized loan
obligation shall be an open market
collateralized loan obligation.
``(II) The holders of the equity of
the collateralized loan obligation
(excluding the risk retention equity
held as required by subparagraph (A))
shall have the right to remove by vote
the manager for cause.
``(III) A majority of the manager's
fees, including any incentive fee,
shall be subordinated to payments then
due in relation to the collateralized
loan obligation's debt securities.
``(IV) The manager's discretionary
sales of assets on behalf of the issuer
of the collateralized loan obligation
shall be limited each year to not more
than 30 percent of the principal amount
of the assets of the collateralized
loan obligation (other than sales of
defaulted or credit-deteriorated,
credit-risk, or credit-improved loans).
``(V) The risk retention equity
requirement set forth in subparagraph
(A) is met.
``(VI) All holders of
collateralized loan obligation
securities that are U.S. persons within
the meaning of Regulation S (17 C.F.R.
230; 249) under the Securities Act of
1933, are qualified investors.
``(v) Regulatory oversight requirements.--
``(I) The manager of the
collateralized loan obligation shall be
registered with the Commission as an
investment adviser under section 203 of
the Investment Advisers Act of 1940 (15
U.S.C. 80b-3).
``(II) All purchases and sales of
the assets of the collateralized loan
obligation shall be conducted on an
arm's-length basis and in compliance
with any applicable provisions of the
Investment Advisers Act of 1940.
``(vi) Requirements relating to
transparency and disclosure.--A monthly report
shall be made available to holders of debt
securities of the collateralized loan
obligation, which includes information
regarding--
``(I) a list of assets of the
collateralized loan obligation,
including, with respect to each asset,
the obligor name; the CUSIP (or
security identifier) if applicable, the
interest rate and maturity date, the
type of asset, and the market price for
each asset where available;
``(II) with respect to the
portfolio of assets, the aggregate
principal balance and aggregate
adjusted collateral principal amount
(adjusted as required by the
collateralized loan obligation
governing transaction documents) and
the percentage of such aggregate
adjusted collateral principal
represented by each asset;
``(III) information relating to
each applicable over-collateralization
test and interest coverage test and the
level of compliance in relation to each
test;
``(IV) all purchases, repayments,
and sales of assets; and
``(V) the identity of each
defaulted asset as defined in the
related transaction documents.
``(8) Definitions for purposes of paragraph (7).--For
purposes of paragraph (7), the following definitions apply:
``(A) Balance sheet collateralized loan
obligation.--The term `balance sheet collateralized
loan obligation' means a collateralized loan
obligation--
``(i) whose assets consist predominantly of
loans originated and transferred to the
collateralized loan obligation by one or more
of its affiliates other than in--
``(I) open market transactions;
``(II) from an open market
collateralized loan obligation; or
``(III) from a collateralized loan
obligation in existence as of the
effective date of this paragraph that
is not a balance sheet collateralized
loan obligation; and
``(ii) the assets and liabilities of which
are, immediately after issuance of its asset-
backed securities in a securitization
transaction, included under generally accepted
accounting principles in the consolidated
balance sheet of one or more of its affiliates.
``(B) Collateralized loan obligation.--The term
`collateralized loan obligation' means any issuing
entity of an asset-backed security, as defined in
section 3(a)(79) of the Securities Exchange Act of 1934
(15 U.S.C. 78c(a)(79)), that is comprised primarily of
commercial loans.
``(C) Covenant lite loan.--The term `covenant lite
loan' means, at the time the collaterlized loan
obligation enters into a commitment to acquire such
loan, a loan for which the underlying instruments
neither--
``(i) require the obligor to comply with
any maintenance covenant; nor
``(ii) contain a cross-default provision to
a financing facility of the obligor that
requires the obligor to comply with a
maintenance covenant (including one that may
apply only upon the funding of such other loan
or financing facility); except that if such
loan is pari passu with another loan of the
obligor that would not be a covenant lite loan
under the criteria in this clause, such loan
shall be deemed not to be a covenant lite loan.
For purposes of this clause, the term `pari
passu' means treated equally and without
preference.
``(D) Equity.--The term `equity' means the most
junior class of securities issued by the collateralized
loan obligation (excluding any non-economic security
such as the issuer's common stock) and any additional
class(es) of securities junior to the collateralized
loan obligation's debt securities.
``(E) Manager.--The term `manager' means an
investment manager that is responsible for managing a
collateralized loan obligation under the collateralized
loan obligation's governing transaction documents.
``(F) Open market collateralized loan obligation.--
The term `open market collateralized loan obligation'
means a collateralized loan obligation--
``(i) whose assets consist predominantly of
senior, secured syndicated loans acquired by
such collateralized loan obligation directly
from the sellers thereof in an open market
transaction or from another collateralized loan
obligation and of temporary investments;
``(ii) that is managed by a manager; and
``(iii) that is not a balance sheet
collateralized loan obligation.
``(G) Open market transaction.--The term `open
market transaction' means--
``(i) either an initial loan syndication
transaction or a secondary market transaction
in which a seller offers senior, secured
syndicated loans to prospective purchasers in
the loan market on market terms on an arm's
length basis, which prospective purchasers
include, but are not limited to, entities that
are not affiliated with the seller; or
``(ii) a reverse inquiry from a prospective
purchaser of a senior, secured syndicated loan
through a dealer in the loan market to purchase
a senior, secured syndicated loan to be sourced
by the dealer in the loan market.
``(H) Qualified investor.--The term `qualified
investor' means--
``(i) with respect to securities that
require the payment of principal and interest,
an investor that is a qualified purchaser,
within the meaning of section 3(c)(7) of the
Investment Company Act of 1940 (15 U.S.C. 80a-
3(c)(7)) or an entity owned exclusively by one
or more qualified purchasers; or
``(ii) with respect to securities that do
not require the payment of principal and
interest--
``(I) if the qualified
collateralized loan obligation relies
on such section for its exclusion from
the definition of investment company
under the Investment Company Act of
1940--
``(aa) a qualified
purchaser;
``(bb) a knowledgeable
employee, within the meaning of
Rule 3c-5 promulgated under the
Investment Company Act of 1940;
or
``(cc) an entity owned
exclusively by such a qualified
purchaser or knowledgeable
employee; or
``(II) if the qualified
collateralized loan obligation relies
on Rule 3a-7 promulgated under the
Investment Company Act of 1940 for its
exclusion from the definition of
investment company under that Act and
such securities are not fixed-income
securities, as defined in such rule--
``(aa) a qualified
institutional buyer, within the
meaning of Rule 144A under the
Securities Act of 1933;
``(bb) a person (other than
any rating organization rating
the issuer's securities)
involved in the organization or
operation of the issuer or an
affiliate of such a person, as
defined in Rule 405 under the
Securities Act of 1933; or
``(cc) any entity in which
all of the equity owners are
such qualified institutional
buyers as described in item
(aa) or persons described in
item (bb).''.
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