[House Report 114-596]
[From the U.S. Government Publishing Office]


114th Congress    }                                      {      Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                      {     114-596

======================================================================



 
         EXPANDING PROVEN FINANCING FOR AMERICAN EMPLOYERS ACT

                                _______
                                

  May 26, 2016.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Hensarling, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 4166]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 4166) to amend the Securities Exchange Act of 
1934 to provide specific credit risk retention requirements to 
certain qualifying collateralized loan obligations, having 
considered the same, report favorably thereon with an amendment 
and recommend that the bill as amended do pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

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 the value of no less 
                than five percent of the equity distributed among each 
                of the higher tranches of the issuance with no less 
                than 3.5 percent retained as 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 100 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, except that each asset 
                                shall require the disclosure of 
                                unaudited financial statements 
                                quarterly within 45 days of the end of 
                                the quarter and audited financial 
                                statements annually within 90 days of 
                                the end of the fiscal year; 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 collateralized 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).''.

                          Purpose and Summary

    Introduced by Representatives Andy Barr and David Scott of 
Georgia on December 3, 2015, H.R. 4166, the Expanding Proven 
Financing for American Employers Act, amends the risk retention 
requirements contained in Section 941 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act) for 
managers that organize collateralized loan obligations 
(``CLOs'') that are ``qualified collateralized loan 
obligations'' or ``QCLOs.'' The bill establishes objective and 
substantive criteria to qualify as a QCLO and defines the types 
of investors who would be eligible to purchase the QCLO.

                  Background and Need for Legislation

    Section 941 (Regulation of Credit Risk Retention) of the 
Dodd-Frank Act aims to align the interests of securitizers and 
investors in asset-backed securities by requiring securitizers 
to retain no less than 5 percent of the credit risk in assets 
they sell into a securitization. Section 941 is premised on a 
view that requiring securitizers to retain some credit risk--or 
``skin in the game''--and forcing them to bear losses if a 
borrower defaults incentivizes securitizers to better monitor 
the quality of bundled loans. The Dodd-Frank Act required the 
SEC, the federal banking agencies, the Department of Housing 
and Urban Development, and the Federal Housing Finance Agency 
(collectively, the ``Agencies'') to jointly prescribe rules 
implementing the risk retention requirement (the ``Final 
Rules''). The Final Rules do not provide an exemption for QCLOs 
despite the fact that many market participants had requested 
such an exemption during the comment period.
    Consequently, QCLOs are subject to risk retention 
requirements that are extremely detrimental to the $4 trillion 
corporate loan market. Specifically, banks and non-bank lenders 
provide nearly $4 trillion in syndicated loan and loan 
commitments to companies. Some of these companies that utilize 
QCLOs for financing are blue chip investment grade companies 
like IBM, UPS, McDonalds and Microsoft. It is important to note 
that CLOs represent a critical, steady, and proven source of 
financing; they are not complicated derivatives.
    Despite these facts, the Agencies refused to apply risk 
retention requirements to CLOs in an appropriately tailored 
way. When the rules become effective in December 2016, they 
will significantly impair the CLO market and, as a result, make 
credit more expensive or unavailable to borrowers. As noted in 
testimony before the Capital Markets and Government Sponsored 
Enterprises Subcommittee by Meredith Coffey, the Executive Vice 
President of the Loan Syndications and Trading Association, the 
risk retention rules have already negatively impacted the 
markets. In 2014, U.S. CLO formation equaled $124 billion; CLOs 
were not structured to comply with the risk retention rule, 
which was not finalized. However, in anticipation of the Final 
Rules becoming effective, in mid-2015, investors started to ask 
managers to make their new CLOs compliant with the new risk 
retention rules. Complying with the burdensome new rules had a 
direct impact on the number of CLOs issued, which declined by 
20% from 2014 levels. This represents a direct impact on the 
amount of available financing for companies.
    Unfortunately, the Agencies' Final Rules also 
inappropriately pick ``winners'' and ``losers'' among CLO 
managers. Only the large CLO managers have the capital to 
retain the risk pursuant to the Final Rules, whereas smaller 
CLO managers would struggle.
    Specifically, there are three problems with the Agencies' 
Final Rules:
          (1) They are inconsistent with Section 941 of the 
        Dodd-Frank Act's plain language because they deem the 
        buyer of assets--i.e., the CLO manager--to be the 
        securitizer that is subject to risk retention 
        requirements, rather than the originating seller;
          (2) The Agencies required securitizers to retain 5% 
        of the full amount of any securitization rather than 5% 
        of the credit risk. The reality is that the credit risk 
        is concentrated in the first loss position--indeed, 
        that is why it is called the first loss position--so 
        holding equity equivalent to 5% of the full 
        securitization is far more than 5% of the credit risk; 
        and
          (3) As a practical economic matter, it is challenging 
        for open market CLO managers to purchase and retain 5% 
        of the notes of the CLOs they manage. It is simply too 
        much money. Requiring a CLO manager to purchase and 
        retain 5% of every new CLO is akin to requiring a 
        mutual fund manager to buy $5 of Apple stock for every 
        $100 of Apple stock it buys, as a fiduciary, for the 
        benefit of its investors. The mutual fund manager would 
        quickly run out of money and would no longer be able to 
        offer mutual funds to its investors. The same is true 
        with CLO managers.
    H.R. 4166 corrects the regulators' failure to adopt risk 
retention requirements that are appropriately tailored to a 
products' risk. As noted previously, the current risk retention 
requirements would severely limit available credit to 
companies, which, in some cases, is necessary to pay for 
expenses such as employees' payroll. H.R. 4166 is consistent 
with the policy objectives of Section 941 of the Dodd-Frank 
Act, because it requires managers to hold 5% of the credit risk 
of assets (rather than their fair value). Additionally, H.R. 
4166 mandates that QCLOs adhere to a number of best practices.
    According to testimony received by the Subcommittee on 
Capital Markets, as of January 2016, ``CLOs provided more than 
$420 billion in financing to U.S. non-investment grade 
companies like Del Monte, Chrysler and United Continental 
Airlines. All told, more than 1,200 companies--employing more 
than six million people--receive financing from CLOs.'' On 
February 16, 2016, Moody's published a report noting that U.S. 
non-investment grade companies will have a record amount of 
debt coming due through 2020. This debt will need to be 
refinanced or the companies could face a credit crunch; by 
tailoring risk retention rules for QCLOs, H.R. 4166 will ensure 
the continued availability of credit.
    CLOs have been a stable, safe and proven source of 
financing for U.S. companies for 20 years. CLOs survived the 
worst financial crisis since the Great Depression with 
extremely low default and loss rates. Moreover, they continue 
to provide over $400 billion in financing to U.S. companies. 
Unfortunately, risk retention has the potential to decimate 
this important market. This diminution of the CLO market will 
either reduce financing for companies or raise their financing 
costs. Fortunately, the QCLO category established by H.R. 4166 
represents a commonsense solution that would implement risk 
retention requirements consistent with the goals of the Dodd-
Frank Act, and ensure that such requirements are appropriately 
tailored to the risks associated with a QCLO. In conclusion, 
H.R. 4166 permits the CLO market to function efficiently and 
provide financing to the 1,200 American companies that rely 
upon a vibrant secondary market for corporate loans.

                                Hearings

    The Committee on Financial Services' Subcommittee on 
Capital Markets and Government Sponsored Enterprises held a 
hearing examining matters relating to H.R. 4166 on February 24, 
2016.

                        Committee Consideration

    The Committee on Financial Services met in open session on 
March 2, 2016, and ordered H.R. 4166 to be reported favorably 
to the House as amended by a recorded vote of 42 yeas to 15 
nays (recorded vote no. FC-99), a quorum being present. An 
amendment offered by Mr. Foster (no. 1) was agreed to by voice 
vote. A second amendment offered by Mr. Foster (no. 2) was 
withdrawn.

                            Committee Votes

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. The 
sole record vote in Committee was a motion by Chairman 
Hensarling to report the bill favorably to the House as 
amended. That motion was agreed to by a recorded vote of 42 
yeas to 15 nays (Record vote no. FC-99), a quorum being 
present.


                      Committee Oversight Findings

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the findings and recommendations of 
the committee based on oversight activities under clause 
2(b)(1) of rule X of the Rules of the House of Representatives, 
are incorporated in the descriptive portions of this report.

                    Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that H.R. 4166 
will reduce regulatory burden and increase access to capital by 
amending the Dodd-Frank Act's risk retention requirements for 
managers that organize ``qualified collateralized loan 
obligations,'' so that they are appropriately tailored to such 
products' risks.

   New Budget Authority, Entitlement Authority, and Tax Expenditures

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act of 1974.

                        Committee Cost Estimate

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                 Congressional Budget Office Estimates

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                     U.S. Congress,
                               Congressional Budget Office,
                                      Washington, DC, May 23, 2016.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 4166, the 
Expanding Proven Financing for American Employers Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Stephen 
Rabent.
            Sincerely,
                                                        Keith Hall.
    Enclosure.

H.R. 4166--Expanding Proven Financing for American Employers Act

    H.R. 4166 would modify the regulatory standards that govern 
the sales of securities that are backed by a pool of financial 
assets. Under current law, the federal banking agencies--the 
Federal Reserve, the Office of the Comptroller of the Currency 
(OCC), and the Federal Deposit Insurance Corporation (FDIC)--
and the Securities and Exchange Commission (SEC) require firms 
that issue asset-backed securities to retain an economic 
interest in a portion of the credit risk stemming from those 
assets, a feature known as risk retention. This bill would 
allow firms to meet some of those requirements by retaining a 
financial interest in certain qualified collateralized loan 
obligations (a type of debt security), including assets 
primarily backed by commercial loans.
    Implementing H.R. 4166 would require the SEC and the 
federal banking agencies to revise current regulations 
concerning exemptions to risk-retention requirements. Based on 
information from those four agencies, CBO estimates that the 
costs of revising the regulations would not be significant. The 
SEC is authorized to collect fees sufficient to offset its 
annual appropriation; therefore, CBO estimates that the net 
effect on discretionary spending would be negligible, assuming 
appropriations actions consistent with that authority.
    Costs incurred by the FDIC and the OCC are recorded in the 
budget as increases in direct spending. Those two agencies are 
authorized to collect premiums and fees from insured depository 
institutions to cover administrative expenses. CBO expects that 
they would do so to recover any costs associated with amending 
current regulations under the bill. Costs to the Federal 
Reserve System are reflected on the federal budget as a 
reduction in remittances to the Treasury (which are recorded in 
the budget as revenues). Because enacting H.R. 4166 would 
affect direct spending and revenues, pay-as-you-go procedures 
apply. However, CBO estimates that the net effects would be 
insignificant for each year. CBO estimates that enacting H.R. 
4166 would not increase net direct spending or on-budget 
deficits in any of the four consecutive 10-year periods 
beginning in 2027.
    H.R. 4166 contains no intergovernmental mandates as defined 
in the Unfunded Mandates Reform Act (UMRA) and would not affect 
the budgets of state, local, or tribal governments.
    If the SEC, FDIC, or OCC increase fees to offset the costs 
of implementing the bill, H.R. 4166 would increase the cost of 
an existing mandate on private entities required to pay those 
fees. Based on information from the affected agencies, CBO 
estimates that the incremental cost of the mandate, if imposed, 
would be minimal and would fall well below the annual threshold 
for private-sector mandates established in UMRA ($154 million 
in 2016, adjusted annually for inflation).
    The CBO staff contact for this estimate is Stephen Rabent. 
The estimate was approved by H. Samuel Papenfuss, Deputy 
Assistant Director for Budget Analysis.

                       Federal Mandates Statement

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      Advisory Committee Statement

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                  Applicability to Legislative Branch

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of the section 
102(b)(3) of the Congressional Accountability Act.

                         Earmark Identification

    H.R. 4166 does not contain any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9 of rule XXI.

                    Duplication of Federal Programs

    Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015), 
the Committee states that no provision of H.R. 4166 establishes 
or reauthorizes a program of the Federal Government known to be 
duplicative of another Federal program, a program that was 
included in any report from the Government Accountability 
Office to Congress pursuant to section 21 of Public Law 111-
139, or a program related to a program identified in the most 
recent Catalog of Federal Domestic Assistance.

                   Disclosure of Directed Rulemaking

    Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015), 
the Committee states that H.R. 4166 contains no directed 
rulemaking.

             Section-by-Section Analysis of the Legislation


Section 1: Short title

    This section cites H.R. 4166 as the ``Expanding Proven 
Financing for American Employers Act.''

Section 2: Risk retention requirement for qualified collateralized loan 
        obligations

    This section amends Section 15G(e) of the Securities 
Exchange Act of 1934 relating to risk retention requirements 
for managers that organize ``qualified collateralized loan 
obligations.'' Specifically, this section modifies the risk 
retention requirement from 5% of the ``fair value'' of any 
collateralized loan obligation (CLO) to 5% of the equity of a 
qualified collateralized loan obligation (QCLO).
    This section also establishes QCLOs as a subset of CLOs. 
Specifically, QCLOs must satisfy six criteria relating to: (1) 
Quality of assets--for example, at least 90% of the assets must 
be senior secured loans and cash equivalents; (2) portfolio 
diversification; (3) minimum capital structure requirements; 
(4) alignment of manger and investor interests; (5) reporting 
and disclosure obligations; and (6) manager regulation.

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (new matter is 
printed in italics and existing law in which no change is 
proposed is shown in roman):

                    SECURITIES EXCHANGE ACT OF 1934

TITLE I--REGULATION OF SECURITIES EXCHANGES

           *       *       *       *       *       *       *


SEC. 15G. CREDIT RISK RETENTION.

  (a) Definitions.--In this section--
          (1) the term ``Federal banking agencies'' means the 
        Office of the Comptroller of the Currency, the Board of 
        Governors of the Federal Reserve System, and the 
        Federal Deposit Insurance Corporation;
          (2) the term ``insured depository institution'' has 
        the same meaning as in section 3(c) of the Federal 
        Deposit Insurance Act (12 U.S.C. 1813(c));
          (3) the term ``securitizer'' means--
                  (A) an issuer of an asset-backed security; or
                  (B) a person who organizes and initiates an 
                asset-backed securities transaction by selling 
                or transferring assets, either directly or 
                indirectly, including through an affiliate, to 
                the issuer; and
          (4) the term ``originator'' means a person who--
                  (A) through the extension of credit or 
                otherwise, creates a financial asset that 
                collateralizes an asset-backed security; and
                  (B) sells an asset directly or indirectly to 
                a securitizer.
  (b) Regulations Required.--
          (1) In general.--Not later than 270 days after the 
        date of enactment of this section, the Federal banking 
        agencies and the Commission shall jointly prescribe 
        regulations to require any securitizer to retain an 
        economic interest in a portion of the credit risk for 
        any asset that the securitizer, through the issuance of 
        an asset-backed security, transfers, sells, or conveys 
        to a third party.
          (2) Residential mortgages.--Not later than 270 days 
        after the date of the enactment of this section, the 
        Federal banking agencies, the Commission, the Secretary 
        of Housing and Urban Development, and the Federal 
        Housing Finance Agency, shall jointly prescribe 
        regulations to require any securitizer to retain an 
        economic interest in a portion of the credit risk for 
        any residential mortgage asset that the securitizer, 
        through the issuance of an asset-backed security, 
        transfers, sells, or conveys to a third party.
  (c) Standards for Regulations.--
          (1) Standards.--The regulations prescribed under 
        subsection (b) shall--
                  (A) prohibit a securitizer from directly or 
                indirectly hedging or otherwise transferring 
                the credit risk that the securitizer is 
                required to retain with respect to an asset;
                  (B) require a securitizer to retain--
                          (i) not less than 5 percent of the 
                        credit risk for any asset--
                                  (I) that is not a qualified 
                                residential mortgage that is 
                                transferred, sold, or conveyed 
                                through the issuance of an 
                                asset-backed security by the 
                                securitizer; or
                                  (II) that is a qualified 
                                residential mortgage that is 
                                transferred, sold, or conveyed 
                                through the issuance of an 
                                asset-backed security by the 
                                securitizer, if 1 or more of 
                                the assets that collateralize 
                                the asset-backed security are 
                                not qualified residential 
                                mortgages; or
                          (ii) less than 5 percent of the 
                        credit risk for an asset that is not a 
                        qualified residential mortgage that is 
                        transferred, sold, or conveyed through 
                        the issuance of an asset-backed 
                        security by the securitizer, if the 
                        originator of the asset meets the 
                        underwriting standards prescribed under 
                        paragraph (2)(B);
                  (C) specify--
                          (i) the permissible forms of risk 
                        retention for purposes of this section;
                          (ii) the minimum duration of the risk 
                        retention required under this section; 
                        and
                          (iii) that a securitizer is not 
                        required to retain any part of the 
                        credit risk for an asset that is 
                        transferred, sold or conveyed through 
                        the issuance of an asset-backed 
                        security by the securitizer, if all of 
                        the assets that collateralize the 
                        asset-backed security are qualified 
                        residential mortgages;
                  (D) apply, regardless of whether the 
                securitizer is an insured depository 
                institution;
                  (E) with respect to a commercial mortgage, 
                specify the permissible types, forms, and 
                amounts of risk retention that would meet the 
                requirements of subparagraph (B), which in the 
                determination of the Federal banking agencies 
                and the Commission may include--
                          (i) retention of a specified amount 
                        or percentage of the total credit risk 
                        of the asset;
                          (ii) retention of the first-loss 
                        position by a third-party purchaser 
                        that specifically negotiates for the 
                        purchase of such first loss position, 
                        holds adequate financial resources to 
                        back losses, provides due diligence on 
                        all individual assets in the pool 
                        before the issuance of the asset-backed 
                        securities, and meets the same 
                        standards for risk retention as the 
                        Federal banking agencies and the 
                        Commission require of the securitizer;
                          (iii) a determination by the Federal 
                        banking agencies and the Commission 
                        that the underwriting standards and 
                        controls for the asset are adequate; 
                        and
                          (iv) provision of adequate 
                        representations and warranties and 
                        related enforcement mechanisms; and
                  (F) establish appropriate standards for 
                retention of an economic interest with respect 
                to collateralized debt obligations, securities 
                collateralized by collateralized debt 
                obligations, and similar instruments 
                collateralized by other asset-backed 
                securities; and
                  (G) provide for--
                          (i) a total or partial exemption of 
                        any securitization, as may be 
                        appropriate in the public interest and 
                        for the protection of investors;
                          (ii) a total or partial exemption for 
                        the securitization of an asset issued 
                        or guaranteed by the United States, or 
                        an agency of the United States, as the 
                        Federal banking agencies and the 
                        Commission jointly determine 
                        appropriate in the public interest and 
                        for the protection of investors, except 
                        that, for purposes of this clause, the 
                        Federal National Mortgage Association 
                        and the Federal Home Loan Mortgage 
                        Corporation are not agencies of the 
                        United States;
                          (iii) a total or partial exemption 
                        for any asset-backed security that is a 
                        security issued or guaranteed by any 
                        State of the United States, or by any 
                        political subdivision of a State or 
                        territory, or by any public 
                        instrumentality of a State or territory 
                        that is exempt from the registration 
                        requirements of the Securities Act of 
                        1933 by reason of section 3(a)(2) of 
                        that Act (15 U.S.C. 77c(a)(2)), or a 
                        security defined as a qualified 
                        scholarship funding bond in section 
                        150(d)(2) of the Internal Revenue Code 
                        of 1986, as may be appropriate in the 
                        public interest and for the protection 
                        of investors; and
                          (iv) the allocation of risk retention 
                        obligations between a securitizer and 
                        an originator in the case of a 
                        securitizer that purchases assets from 
                        an originator, as the Federal banking 
                        agencies and the Commission jointly 
                        determine appropriate.
          (2) Asset classes.--
                  (A) Asset classes.--The regulations 
                prescribed under subsection (b) shall establish 
                asset classes with separate rules for 
                securitizers of different classes of assets, 
                including residential mortgages, commercial 
                mortgages, commercial loans, auto loans, and 
                any other class of assets that the Federal 
                banking agencies and the Commission deem 
                appropriate.
                  (B) Contents.--For each asset class 
                established under subparagraph (A), the 
                regulations prescribed under subsection (b) 
                shall include underwriting standards 
                established by the Federal banking agencies 
                that specify the terms, conditions, and 
                characteristics of a loan within the asset 
                class that indicate a low credit risk with 
                respect to the loan.
  (d) Originators.--In determining how to allocate risk 
retention obligations between a securitizer and an originator 
under subsection (c)(1)(E)(iv), the Federal banking agencies 
and the Commission shall--
          (1) reduce the percentage of risk retention 
        obligations required of the securitizer by the 
        percentage of risk retention obligations required of 
        the originator; and
          (2) consider--
                  (A) whether the assets sold to the 
                securitizer have terms, conditions, and 
                characteristics that reflect low credit risk;
                  (B) whether the form or volume of 
                transactions in securitization markets creates 
                incentives for imprudent origination of the 
                type of loan or asset to be sold to the 
                securitizer; and
                  (C) the potential impact of the risk 
                retention obligations on the access of 
                consumers and businesses to credit on 
                reasonable terms, which may not include the 
                transfer of credit risk to a third party.
  (e) Exemptions, Exceptions, and Adjustments.--
          (1) In general.--The Federal banking agencies and the 
        Commission may jointly adopt or issue exemptions, 
        exceptions, or adjustments to the rules issued under 
        this section, including exemptions, exceptions, or 
        adjustments for classes of institutions or assets 
        relating to the risk retention requirement and the 
        prohibition on hedging under subsection (c)(1).
          (2) Applicable standards.--Any exemption, exception, 
        or adjustment adopted or issued by the Federal banking 
        agencies and the Commission under this paragraph 
        shall--
                  (A) help ensure high quality underwriting 
                standards for the securitizers and originators 
                of assets that are securitized or available for 
                securitization; and
                  (B) encourage appropriate risk management 
                practices by the securitizers and originators 
                of assets, improve the access of consumers and 
                businesses to credit on reasonable terms, or 
                otherwise be in the public interest and for the 
                protection of investors.
          (3) Certain institutions and programs exempt.--
                  (A) Farm credit system institutions.--
                Notwithstanding any other provision of this 
                section, the requirements of this section shall 
                not apply to any loan or other financial asset 
                made, insured, guaranteed, or purchased by any 
                institution that is subject to the supervision 
                of the Farm Credit Administration, including 
                the Federal Agricultural Mortgage Corporation.
                  (B) Other federal programs.--This section 
                shall not apply to any residential, 
                multifamily, or health care facility mortgage 
                loan asset, or securitization based directly or 
                indirectly on such an asset, which is insured 
                or guaranteed by the United States or an agency 
                of the United States. For purposes of this 
                subsection, the Federal National Mortgage 
                Association, the Federal Home Loan Mortgage 
                Corporation, and the Federal home loan banks 
                shall not be considered an agency of the United 
                States.
          (4) Exemption for qualified residential mortgages.--
                  (A) In general.--The Federal banking 
                agencies, the Commission, the Secretary of 
                Housing and Urban Development, and the Director 
                of the Federal Housing Finance Agency shall 
                jointly issue regulations to exempt qualified 
                residential mortgages from the risk retention 
                requirements of this subsection.
                  (B) Qualified residential mortgage.--The 
                Federal banking agencies, the Commission, the 
                Secretary of Housing and Urban Development, and 
                the Director of the Federal Housing Finance 
                Agency shall jointly define the term 
                ``qualified residential mortgage'' for purposes 
                of this subsection, taking into consideration 
                underwriting and product features that 
                historical loan performance data indicate 
                result in a lower risk of default, such as--
                          (i) documentation and verification of 
                        the financial resources relied upon to 
                        qualify the mortgagor;
                          (ii) standards with respect to--
                                  (I) the residual income of 
                                the mortgagor after all monthly 
                                obligations;
                                  (II) the ratio of the housing 
                                payments of the mortgagor to 
                                the monthly income of the 
                                mortgagor;
                                  (III) the ratio of total 
                                monthly installment payments of 
                                the mortgagor to the income of 
                                the mortgagor;
                          (iii) mitigating the potential for 
                        payment shock on adjustable rate 
                        mortgages through product features and 
                        underwriting standards;
                          (iv) mortgage guarantee insurance or 
                        other types of insurance or credit 
                        enhancement obtained at the time of 
                        origination, to the extent such 
                        insurance or credit enhancement reduces 
                        the risk of default; and
                          (v) prohibiting or restricting the 
                        use of balloon payments, negative 
                        amortization, prepayment penalties, 
                        interest-only payments, and other 
                        features that have been demonstrated to 
                        exhibit a higher risk of borrower 
                        default.
                  (C) Limitation on definition.--The Federal 
                banking agencies, the Commission, the Secretary 
                of Housing and Urban Development, and the 
                Director of the Federal Housing Finance Agency 
                in defining the term ``qualified residential 
                mortgage'', as required by subparagraph (B), 
                shall define that term to be no broader than 
                the definition ``qualified mortgage'' as the 
                term is defined under section 129C(c)(2) of the 
                Truth in Lending Act, as amended by the 
                Consumer Financial Protection Act of 2010, and 
                regulations adopted thereunder.
          (5) Condition for qualified residential mortgage 
        exemption.--The regulations issued under paragraph (4) 
        shall provide that an asset-backed security that is 
        collateralized by tranches of other asset-backed 
        securities shall not be exempt from the risk retention 
        requirements of this subsection.
          (6) Certification.--The Commission shall require an 
        issuer to certify, for each issuance of an asset-backed 
        security collateralized exclusively by qualified 
        residential mortgages, that the issuer has evaluated 
        the effectiveness of the internal supervisory controls 
        of the issuer with respect to the process for ensuring 
        that all assets that collateralize the asset-backed 
        security are qualified residential mortgages.
          (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 the 
                value of no less than five percent of the 
                equity distributed among each of the higher 
                tranches of the issuance with no less than 3.5 
                percent retained as 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 100 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, except 
                                that each asset shall require 
                                the disclosure of unaudited 
                                financial statements quarterly 
                                within 45 days of the end of 
                                the quarter and audited 
                                financial statements annually 
                                within 90 days of the end of 
                                the fiscal year; 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 
                collateralized 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).
  (f) Enforcement.--The regulations issued under this section 
shall be enforced by--
          (1) the appropriate Federal banking agency, with 
        respect to any securitizer that is an insured 
        depository institution; and
          (2) the Commission, with respect to any securitizer 
        that is not an insured depository institution.
  (g) Authority of Commission.--The authority of the Commission 
under this section shall be in addition to the authority of the 
Commission to otherwise enforce the securities laws.
  (h) Authority to Coordinate on Rulemaking.--The Chairperson 
of the Financial Stability Oversight Council shall coordinate 
all joint rulemaking required under this section.
  (i) Effective Date of Regulations.--The regulations issued 
under this section shall become effective--
          (1) with respect to securitizers and originators of 
        asset-backed securities backed by residential 
        mortgages, 1 year after the date on which final rules 
        under this section are published in the Federal 
        Register; and
          (2) with respect to securitizers and originators of 
        all other classes of asset-backed securities, 2 years 
        after the date on which final rules under this section 
        are published in the Federal Register.

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                             MINORITY VIEWS

    H.R. 4166, the so-called ``Expanding Proven Financing for 
American Employers Act,'' creates an exemption from the credit 
risk retention, or ``skin in the game,'' requirements of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010 (or ``Dodd-Frank;'' P.L. 111-203) by creating a new 
category of ``qualified collateralized loan obligations,'' or 
QCLOs, with no underwriting standards and little risk 
retention.
    The Minority recalls that the 2008 crisis was caused--in 
large part--by mortgage companies that originated loans to 
borrowers that had no ability to repay. These companies were 
able to charge high upfront fees for these doomed-to-fail 
mortgages and then, with the help of securitizers, pass the 
risk of default off to unwitting investors. To address this 
problematic ``originate to distribute'' model, Dodd-Frank 
required securitizers to retain an economic interest in the 
credit risk of the mortgages and other assets they securitize 
alongside investors. By retaining this risk, the securitizer 
becomes more concerned with the quality of the underlying loans 
because its money is also at stake.
    While the 2008 crisis primarily related to residential 
mortgages, Congress recognized that all classes of asset-backed 
securities, including collateralized loan obligations (CLOs), 
were subject to the same misalignment of incentives Rather than 
only endeavoring to narrowly address the last crisis, Congress 
passed the Dodd-Frank Act to prevent and mitigate systemic risk 
that may lead to future crises, and therefore provided for risk 
retention requirements for all classes of assets.
    However, H.R. 4166 would diminish the risk retention 
provisions in Dodd-Frank by providing a carve-out for certain 
CLOs, which are typically comprised of loans to riskier 
companies. We note that CLOs are often used to finance private 
equity takeovers of companies through ``leveraged buyouts.'' 
Trade associations representing the CLO industry advocated for 
the QCLO exemption contemplated in H.R. 4166 during the 
financial regulators' comment period on the proposed, and 
reproposed, implementing rules. The regulators rejected those 
comments, noting that the leveraged loan market may be getting 
overheated, and that ``characteristics of the leveraged loan 
market pose potential systemic risks similar to those observed 
in the residential mortgage market,'' before the 2008 crisis.
    Specifically, H.R. 4166 provides that managers of QCLOs 
would only be required to retain 5 percent of the equity 
tranche, or the riskiest tranche, of the CLO (with the 
optionality for the manager to hold onto 1.5 percent of that 5 
percent elsewhere along the securitization chain; i.e., not in 
the riskiest tranche). This proposal stands in contrast to 
regulators' final credit risk retention rule, which requires 
that securitizers retain 5 percent of the aggregate credit risk 
of the securitization--not just 5 percent of the equity 
tranche. By way of example, if the equity tranche was 8 percent 
of the entire securitization, CLO managers would only be 
required to retain 0.4 percent of the aggregate credit risk. If 
H.R. 4166 is adopted, the credit risk requirements in Dodd-
Frank would be rendered largely meaningless for CLOs, as 
information from industry and regulators has stated that nearly 
all existing CLOs issued in recent years would meet the 
parameters to be considered a QCLO under the bill.
    Finally, the Minority notes that the Federal Reserve, the 
Office of the Comptroller of the Currency and the Federal 
Deposit Insurance Corporation have in recent years expressed 
strong concerns with what they see as deteriorating 
underwriting standards in leveraged lending. Additionally, the 
Democratic witnesses at the hearing where H.R. 4166 was 
considered stated that this legislation does not offer 
substantial structural protections to justify the exemption, 
and further stipulated that the final risk retention rule 
already offers an exemption for certain high-quality commercial 
loans.
    For the foregoing reasons, the Minority opposes H.R. 4166.

                                   Maxine Waters.
                                   Keith Ellison.
                                   Ruben Hinojosa.

                                  [all]