I 

114TH CONGRESS 

1ST SESSION H. R. 4166 

To amend the Securities Exchange Act of 1934 to provide specific credit 

risk retention requirements to certain qualifying collateralized loan obligations. 

IN THE HOUSE OF REPRESENTATIVES 

DECEMBER 3, 2015 

Mr. BARR (for himself and Mr. DAVID SCOTT of Georgia) introduced the 

following bill; which was referred to the Committee on Financial Services 

A BILL 

To amend the Securities Exchange Act of 1934 to provide 

specific credit risk retention requirements to certain 

qualifying collateralized loan obligations. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Expanding Proven Fi5 nancing for American Employers Act’’. 

6 SEC. 2. RISK RETENTION REQUIREMENT FOR QUALIFIED 

7 COLLATERALIZED LOAN OBLIGATIONS. 

8 Section 15G(e) of the Securities Exchange Act of 

9 1934 (15 U.S.C. 780–11(e)) is amended by inserting after 

10 paragraph 6 the following new paragraphs: 


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1 ‘‘(7) REQUIREMENTS FOR QUALIFIED

2 COLLATERALIZED LOAN OBLIGATIONS.— 

3 ‘‘(A) RISK RETENTION REQUIREMENT.— 

4 Notwithstanding any other provision of this sec5 tion, as of the effective date set forth in sub6 section (i)(2), the risk retention requirement for 

7 qualified collateralized loan obligations may be 

8 met by the purchase and, during the applicable 

9 duration of risk retention specified by the rules 

10 of the Federal banking agencies under sub11 section (c)(1)(C)(ii), holding (without hedging 

12 or otherwise transferring the credit risk), of no 

13 less than five percent of the equity of the 

14 collateralized loan obligation by the manager of 

15 the qualified collateralized loan obligation or 

16 one or more of the majority-owned affiliates of 

17 the manager or its knowledgeable employees 

18 and other employees. 

19 ‘‘(B) QUALIFIED COLLATERALIZED LOAN

20 OBLIGATIONS.—For purposes of this paragraph, 

21 a qualified collateralized loan obligation is a 

22 collateralized loan obligation that meets all of 

23 the following requirements: 

24 ‘‘(i) ASSET QUALITY PROTECTIONS.— 

25 The collateralized loan obligation shall— 


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1 ‘‘(I) have at least 90 percent of 

2 its assets comprised of senior secured 

3 loans and cash equivalents; 

4 ‘‘(II) have 100 percent of its loan 

5 assets issued by companies; 

6 ‘‘(III) have no assets that are 

7 asset-backed securities or derivatives, 

8 except that this limitation shall not 

9 prohibit a qualified collateralized loan 

10 obligation from acquiring a loan par11 ticipation or any interest related to or 

12 in a letter of credit, or entering into 

13 derivative transactions to hedge inter14 est rate or currency rate mismatches; 

15 ‘‘(IV) not purchase assets in de16 fault, margin stock, or equity convert17 ible securities; 

18 ‘‘(V) acquire only loans held or 

19 acquired by three or more investors or 

20 lenders unaffiliated with the manager; 

21 ‘‘(VI) hold only loans to bor22 rowers whose financial statements are 

23 subject to an annual audit from an 

24 independent, accredited accounting 

25 firm; 


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1 ‘‘(VII) have no more than 60 

2 percent of its assets comprised of cov3 enant lite loans; and 

4 ‘‘(VIII) at the time of purchase 

5 of any asset, comply with the require6 ments of subclauses (I) and (VII) and 

7 clause (ii) of this subparagraph, or, if 

8 not in compliance with any such re9 quirement, maintain or improve the 

10 level of compliance after giving effect 

11 to such purchase. 

12 ‘‘(ii) ASSET PORTFOLIO PROTEC13 TIONS.— 

14 ‘‘(I) No more than 3.5 percent of 

15 the assets of the collateralized loan 

16 obligation may relate to any single 

17 borrower. 

18 ‘‘(II) No more than 15 percent of 

19 the assets of the collateralized loan 

20 obligation may relate to any single in21 dustry. 

22 ‘‘(iii) STRUCTURAL PROTECTIONS.— 

23 ‘‘(I) The collateralized loan obli24 gation’s equity shall be at least 8 per25 cent of the value of its assets. 


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1 ‘‘(II) The governing transaction 

2 documents of the collateralized loan 

3 obligation specify over-collateralization 

4 and interest coverage tests, and if any 

5 such test falls below the required level 

6 specified for the collateralized loan ob7 ligation in such documents, available 

8 interest collections (and if necessary, 

9 available principal collections) must be 

10 applied to repay the collateralized loan 

11 obligation’s debt in order of seniority 

12 until compliance with the applicable 

13 test is restored. 

14 ‘‘(iv) REQUIREMENT TO MAINTAIN

15 ALIGNMENT OF MANAGER AND INVESTOR

16 INTERESTS.— 

17 ‘‘(I) The collateralized loan obli18 gation shall be an open market 

19 collateralized loan obligation. 

20 ‘‘(II) The holders of the equity of 

21 the collateralized loan obligation (ex22 cluding the risk retention equity held 

23 as required by subparagraph (A)) 

24 shall have the right to remove by vote 

25 the manager for cause. 


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1 ‘‘(III) A majority of the man2 ager’s fees, including any incentive 

3 fee, shall be subordinated to payments 

4 then due in relation to the 

5 collateralized loan obligation’s debt se6 curities. 

7 ‘‘(IV) The manager’s discre8 tionary sales of assets on behalf of the 

9 issuer of the collateralized loan obliga10 tion shall be limited each year to not 

11 more than 30 percent of the principal 

12 amount of the assets of the 

13 collateralized loan obligation (other 

14 than sales of defaulted or credit-dete15 riorated, credit-risk, or credit-im16 proved loans). 

17 ‘‘(V) The risk retention equity 

18 requirement set forth in subparagraph 

19 (A) is met. 

20 ‘‘(VI) All holders of collateralized 

21 loan obligation securities that are 

22 U.S. persons within the meaning of 

23 Regulation S (17 C.F.R. 230; 249) 

24 under the Securities Act of 1933, are 

25 qualified investors. 


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1 ‘‘(v) REGULATORY OVERSIGHT RE2 QUIREMENTS.— 

3 ‘‘(I) The manager of the 

4 collateralized loan obligation shall be 

5 registered with the Commission as an 

6 investment adviser under section 203 

7 of the Investment Advisers Act of 

8 1940 (15 U.S.C. 80b–3). 

9 ‘‘(II) All purchases and sales of 

10 the assets of the collateralized loan 

11 obligation shall be conducted on an 

12 arm’s-length basis and in compliance 

13 with any applicable provisions of the 

14 Investment Advisers Act of 1940. 

15 ‘‘(vi) REQUIREMENTS RELATING TO

16 TRANSPARENCY AND DISCLOSURE.—A 

17 monthly report shall be made available to 

18 holders of debt securities of the 

19 collateralized loan obligation, which in20 cludes information regarding— 

21 ‘‘(I) a list of assets of the 

22 collateralized loan obligation, includ23 ing, with respect to each asset, the ob24 ligor name; the CUSIP (or security 

25 identifier) if applicable, the interest 


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1 rate and maturity date, the type of 

2 asset, and the market price for each 

3 asset where available; 

4 ‘‘(II) with respect to the portfolio 

5 of assets, the aggregate principal bal6 ance and aggregate adjusted collateral 

7 principal amount (adjusted as re8 quired by the collateralized loan obli9 gation governing transaction docu10 ments) and the percentage of such ag11 gregate adjusted collateral principal 

12 represented by each asset; 

13 ‘‘(III) information relating to 

14 each applicable over-collateralization 

15 test and interest coverage test and the 

16 level of compliance in relation to each 

17 test; 

18 ‘‘(IV) all purchases, repayments, 

19 and sales of assets; and 

20 ‘‘(V) the identity of each de21 faulted asset as defined in the related 

22 transaction documents. 

23 ‘‘(8) DEFINITIONS FOR PURPOSES OF PARA24 GRAPH (7).—For purposes of paragraph (7), the fol25 lowing definitions apply: 


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1 ‘‘(A) BALANCE SHEET COLLATERALIZED

2 LOAN OBLIGATION.—The term ‘balance sheet 

3 collateralized loan obligation’ means a 

4 collateralized loan obligation— 

5 ‘‘(i) whose assets consist predomi6 nantly of loans originated and transferred 

7 to the collateralized loan obligation by one 

8 or more of its affiliates other than in— 

9 ‘‘(I) open market transactions; 

10 ‘‘(II) from an open market 

11 collateralized loan obligation; or 

12 ‘‘(III) from a collateralized loan 

13 obligation in existence as of the effec14 tive date of this paragraph that is not 

15 a balance sheet collateralized loan ob16 ligation; and 

17 ‘‘(ii) the assets and liabilities of which 

18 are, immediately after issuance of its asset19 backed securities in a securitization trans20 action, included under generally accepted 

21 accounting principles in the consolidated 

22 balance sheet of one or more of its affili23 ates. 

24 ‘‘(B) COLLATERALIZED LOAN OBLIGA25 TION.—The term ‘collateralized loan obligation’ 


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1 means any issuing entity of an asset-backed se2 curity, as defined in section 3(a)(79) of the Se3 curities Exchange Act of 1934 (15 U.S.C. 

4 78c(a)(79)), that is comprised primarily of com5 mercial loans. 

6 ‘‘(C) COVENANT LITE LOAN.—The term 

7 ‘covenant lite loan’ means, at the time the 

8 collaterlized loan obligation enters into a com9 mitment to acquire such loan, a loan for which 

10 the underlying instruments neither— 

11 ‘‘(i) require the obligor to comply with 

12 any maintenance covenant; nor 

13 ‘‘(ii) contain a cross-default provision 

14 to a financing facility of the obligor that 

15 requires the obligor to comply with a main16 tenance covenant (including one that may 

17 apply only upon the funding of such other 

18 loan or financing facility); except that if 

19 such loan is pari passu with another loan 

20 of the obligor that would not be a covenant 

21 lite loan under the criteria in this clause, 

22 such loan shall be deemed not to be a cov23 enant lite loan. For purposes of this 

24 clause, the term ‘pari passu’ means treated 

25 equally and without preference. 


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1 ‘‘(D) EQUITY.—The term ‘equity’ means 

2 the most junior class of securities issued by the 

3 collateralized loan obligation (excluding any 

4 non-economic security such as the issuer’s com5 mon stock) and any additional class(es) of secu6 rities junior to the collateralized loan obliga7 tion’s debt securities. 

8 ‘‘(E) MANAGER.—The term ‘manager’ 

9 means an investment manager that is respon10 sible for managing a collateralized loan obliga11 tion under the collateralized loan obligation’s 

12 governing transaction documents. 

13 ‘‘(F) OPEN MARKET COLLATERALIZED

14 LOAN OBLIGATION.—The term ‘open market 

15 collateralized loan obligation’ means a 

16 collateralized loan obligation— 

17 ‘‘(i) whose assets consist predomi18 nantly of senior, secured syndicated loans 

19 acquired by such collateralized loan obliga20 tion directly from the sellers thereof in an 

21 open market transaction or from another 

22 collateralized loan obligation and of tem23 porary investments; 

24 ‘‘(ii) that is managed by a manager; 

25 and 


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1 ‘‘(iii) that is not a balance sheet 

2 collateralized loan obligation. 

3 ‘‘(G) OPEN MARKET TRANSACTION.—The 

4 term ‘open market transaction’ means— 

5 ‘‘(i) either an initial loan syndication 

6 transaction or a secondary market trans7 action in which a seller offers senior, se8 cured syndicated loans to prospective pur9 chasers in the loan market on market 

10 terms on an arm’s length basis, which pro11 spective purchasers include, but are not 

12 limited to, entities that are not affiliated 

13 with the seller; or 

14 ‘‘(ii) a reverse inquiry from a prospec15 tive purchaser of a senior, secured syn16 dicated loan through a dealer in the loan 

17 market to purchase a senior, secured syn18 dicated loan to be sourced by the dealer in 

19 the loan market. 

20 ‘‘(H) QUALIFIED INVESTOR.—The term 

21 ‘qualified investor’ means— 

22 ‘‘(i) with respect to securities that re23 quire the payment of principal and inter24 est, an investor that is a qualified pur25 chaser, within the meaning of section 


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1 3(c)(7) of the Investment Company Act of 

2 1940 (15 U.S.C. 80a–3(c)(7)) or an entity 

3 owned exclusively by one or more qualified 

4 purchasers; or 

5 ‘‘(ii) with respect to securities that do 

6 not require the payment of principal and 

7 interest— 

8 ‘‘(I) if the qualified collateralized 

9 loan obligation relies on such section 

10 for its exclusion from the definition of 

11 investment company under the Invest12 ment Company Act of 1940— 

13 ‘‘(aa) a qualified purchaser; 

14 ‘‘(bb) a knowledgeable em15 ployee, within the meaning of 

16 Rule 3c–5 promulgated under the 

17 Investment Company Act of 

18 1940; or 

19 ‘‘(cc) an entity owned exclu20 sively by such a qualified pur21 chaser or knowledgeable em22 ployee; or 

23 ‘‘(II) if the qualified 

24 collateralized loan obligation relies on 

25 Rule 3a–7 promulgated under the InVerDate Sep 11 2014 23:54 Dec 04, 2015 Jkt 059200 PO 00000 Frm 00013 Fmt 6652 Sfmt 6201 E:\BILLS\H4166.IH H4166

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1 vestment Company Act of 1940 for its 

2 exclusion from the definition of invest3 ment company under that Act and 

4 such securities are not fixed-income 

5 securities, as defined in such rule— 

6 ‘‘(aa) a qualified institu7 tional buyer, within the meaning 

8 of Rule 144A under the Securi9 ties Act of 1933; 

10 ‘‘(bb) a person (other than 

11 any rating organization rating 

12 the issuer’s securities) involved in 

13 the organization or operation of 

14 the issuer or an affiliate of such 

15 a person, as defined in Rule 405 

16 under the Securities Act of 1933; 

17 or 

18 ‘‘(cc) any entity in which all 

19 of the equity owners are such 

20 qualified institutional buyers as 

21 described in item (aa) or persons 

22 described in item (bb).’’. 

Æ 


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