United States: Dodd-Frank Credit Risk Retention Rules: House Financial Services Committee Passes Bill To Reduce Compliance Burden For Collateral Managers Of Qualified CLOs

On March 2, 2016, the House Financial Services Committee approved a bill, H.R. 4166, sponsored by Representatives Andy Barr (KY) and Dave Scott (GA), that would significantly reduce the credit risk retention obligations imposed on the collateral managers of collateralized loan obligations ("CLOs") under regulations recently adopted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. 


The Dodd-Frank credit risk retention rules will apply to CLOs that close (or in certain cases are materially amended) on or after December 24, 2016. As currently drafted, the rules specify that for each such CLO, the relevant collateral manager must purchase and hold, unhedged, directly or through a majority-owned affiliate, either (i) 5% of each tranche of the CLO's securities, (ii) an amount of the CLO's equity equal to 5% of the aggregate fair value of all of the CLO's securities or (iii) a combination of the two. The required risk must be retained until the latest of (x) the date that the CLO has paid down its securities to 33% of their original principal amount, (y) the date that the CLO has sold down its assets to 33% of their original principal amount and (z) the date that is two years after closing.

If passed by both the full House of Representatives and the Senate, and signed into law by the President (a process that admittedly involves considerable hurdles, particularly in an election year), H.R. 4166 would reduce the amount of CLO securities required to be held by the collateral manager of a "qualified collateralized loan obligation" (or "QCLO") to an amount equal to 5% of the CLO's equity securities. Since CLO equity typically represents less than 10% of the aggregate value of the securities issued by a given CLO, this change would translate into more than a 90% reduction in the amount of securities that a manager of a QCLO would need to purchase in order to comply with the risk retention rules. 

Criteria for Qualified CLOs

The criteria for a QCLO are set out in the bill and were developed in consultation with industry participants to track, or be less restrictive than, the terms of most CLOs of broadly syndicated loans that have recently been offered in the U.S. A QCLO must comply with the following criteria:

  1. Asset quality protections

    • At the time that the CLO purchases any asset, it must either be in compliance with the following criteria or, if it is not in compliance, maintain or improve its level of compliance after giving effect to the purchase:

      • 90%1 of the CLO's assets must be senior secured loans and cash equivalents.
      • No more than 60% of the CLO's asset may be covenant lite loans.
    • All of the loans held by the CLO must be issued by companies that issue financial statements that are audited annually by an independent, accredited accounting firm.2
    • At the time of its purchase, each loan must have at least three other investors or lenders that are unaffiliated with the CLO's collateral manager.
    • The CLO may not hold any asset-backed securities or derivatives, with the exception of loan participations, letters of credit, or derivative transactions entered into for the purpose of hedging interest rate or currency mismatches.
    • The CLO may not purchase assets in default, margin stock or securities convertible into equity.
  2. Asset portfolio protections

    • At the time that the CLO purchases any asset, it must either be in compliance with the following criteria or, if it is not in compliance, maintain or improve its level of compliance after giving effect to the purchase:

      • No more than 3.5% of the assets of the CLO may relate to a single obligor.
      • No more than 15% of the assets of the CLO may relate to a single industry.
  3. Structural protections

    • The CLO's equity tranche must be at least 8% of the value of its assets.
    • The CLO's transaction documents must contain over-collateralization and interest coverage tests, the breach of which will cause interest collections (and, if necessary, available principal collections) to be applied to pay down the CLO's debt in order of seniority until compliance with the applicable test is restored.
  4. Alignment of manager and investor interests

    • The CLO must be an open market CLO (defined in the bill as a managed CLO whose assets consist predominantly of senior secured syndicated loans acquired in open market transactions).
    • The CLO's equity investors, excluding risk retention equity, must have the right to remove the collateral manager for cause.
    • A majority of the manager's fees (including any incentive fee) must be subordinated to payments then due on the CLO's debt.
    • Discretionary sales by the manager of the CLO's assets (excluding sales of defaulted, credit deteriorated, credit risk and credit improved loans) must be capped at 30% of the aggregate principal amount of the CLO's assets annually.
    • All holders of the CLO's securities that are U.S. persons (as defined in Regulation S promulgated under the Securities Act of 1933, as amended) must be qualified investors, defined in the case of CLO debt to mean qualified purchasers (as defined in Section 2(a)(51) of the Investment Company Act of 1940, as amended (the "Investment Company Act")) and in the case of most issuances of CLO equity to mean qualified purchasers and knowledgeable employees (within the meaning of Rule 3c-5 promulgated under the Investment Company Act).
  5. Regulatory oversight

    • The CLO's collateral manager must be an SEC-registered investment adviser.
    • All purchases and sales of the CLO's assets must be conducted on an arm's-length basis and in compliance with the Investment Advisers Act of 1940, as amended.
  6. Transparency and Disclosure

    • The CLO must deliver a monthly report to its debt investors that includes the following information:

      • A list of the CLO's assets, detailing for each asset the name of its obligor, its CUSIP or security identifier (if applicable), its interest rate and maturity date, the type of asset and its market price (where available).
      • The aggregate principal balance and aggregate adjusted collateral principal amount (as defined in the CLO's transaction documents) of the CLO's portfolio, and the percentage of the aggregate adjusted collateral principal amount represented by each asset.
      • The level of compliance with each of the CLO's over-collateralization and interest coverage tests.
      • All purchases, repayments and sales of assets.
      • The identity of each defaulted asset (as defined in the CLO's transaction documents).

Form of Retained Risk

H.R. 4166 originally proposed that a collateral manager of a QCLO be able to meet its reduced risk retention obligation by holding 5% of such CLO's equity securities. The House Financial Services Committee, however, approved an amendment to the bill proposed by Representative Bill Foster (IL) (the "Foster amendment"), under which the manager's retained risk must be held through a combination of CLO debt and equity in an aggregate amount equal to the value of 5% of the CLO equity, with the equity securities representing at least 3.5%. These securities may be held either directly by the collateral manager, by a majority-owned affiliate of the manager (as defined in the existing risk retention rules) or by the manager's employees. 


1 The Foster amendment (referred to below) increased this percentage to 100%. It is as yet unclear how this change will affect the portion of the bill that currently permits QCLOs to invest in a limited amount of other assets, such as loan participations and certain hedging arrangements. Presumably, however, the sponsors of the bill will work to harmonize it with the "loan securitization" exemption of the Volcker Rule, which permits CLOs to hold loan participations and hedges subject to certain conditions and which is broadly relied upon in the U.S. CLO markets in order to permit bank investments in CLOs.

2 The Foster amendment added a requirement that these audited financial statements be delivered within 90 days of the end of the obligor's fiscal year, and that the obligor deliver unaudited financial statements within 45 days after the end of each fiscal quarter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.