Loan Market Legislation and Regulation; All is Quiet(ish)
More than a half-year into the Biden administration and the new Congress, it is a good time to reflect on what’s been going on in Congress and among loan market legislation and regulation in the area of financial services. In a nutshell, not much has happened so far, something bad did not happen, and we can ruminate about what might happen over the coming months.
Unlike in the aftermath of the great financial crisis, banks and other financial services companies did very well through the pandemic (after a brief, but significant downturn). Accordingly, Congress has not spent much of its scarce time focusing on financial services. The hearings that were held mostly focused on Robinhood and the so-called “gamification” of the stock market, as well as on diversity, equity and inclusion and ESG. On the regulatory side, the Biden team has been staffing up across the financial services agencies, most importantly for loan market legislation and regulation with the choice of Gary Gensler, who has a well-deserved reputation as an activist regulator, as Chair of the SEC. Importantly, the administration has not yet picked anyone to lead the OCC, the agency that regulates national banks; the choice will likely come from the progressive wing of the party.
The most significant development to impact the loan and CLO markets is something that didn’t happen. Last year, federal regulatory agencies published a final rule that significantly revised the Dodd-Frank era Volcker Rule. Under the previous rule, CLOs could only hold loans and cash equivalents. Under the revised rule, they could also hold non-loan securities such as bonds. The importance of this change is not just that it gives CLOs more optionality and diversification in their portfolios, but that it makes it easier for them to participate in restructurings in which non-loan securities are part of the package. However, this revision was subject to voidance by a simple majority of Congress under the Congressional Review Act. The good news is that this did not happen and the time for such voidance has passed.
The other major development in Congress was the recent introduction of a bill that would significantly limit the ability of bankruptcy courts to permit non-debtor third party releases in bankruptcy. This bill was introduced at a House Judiciary Committee hearing focusing on alleged abuses of the bankruptcy process relating to Purdue Pharma, Boy Scouts of America and USA Gymnastics mass tort cases but, if passed, would have a profound impact on corporate bankruptcies, particularly those associated with private equity sponsors. The LSTA will continue to watch this bill carefully given its importance.
So, what else do we expect in the coming months? We do not anticipate that Congress to be super focused on the loan and CLO markets but do anticipate that Senator Warren will introduce a bill that seeks to reimpose risk retention requirements on CLO managers. We also expect to see at least one Chapter 11 bankruptcy reform bill introduced that would favor other classes of creditors over senior secured lenders. With very tight majorities in both the House and Senate, it will likely be difficult for these bills to get traction in the near term. Nevertheless, given the downside, it is imprudent to be complacent. On the regulatory side, we expect to see movement from the SEC on climate change disclosure for registered advisers and, potentially, proposed rules on disclosure for governance, diversity and political giving. To stay tapped in to current political and advocacy issues affecting loan market legislation and regulation, sign up (for free) to the LSTA’s grassroots advocacy affiliate, the Business Loans Coalition.
Guest post written by Elliot Ganz, General Counsel and Co-head of Public Policy, LSTA
To learn more about loan market legislation and regulation as well as news, commentary and analysis on issues affecting the high-yield, stressed and distressed markets in North and South America visit our Americas Core Credit page.