I 115th CONGRESS 1st Session H. R. 3772 IN THE HOUSE OF REPRESENTATIVES September 14, 2017 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. Short title This Act may be cited as the Expanding Proven Financing for American Employers Act . 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 securities of the collateralized loan obligation with the value of not less than 5 percent of the equity of the collateralized loan obligation by the manager of the qualified collateralized loan obligation or one or more of the majority-owned affiliates of the manager or its knowledgeable employees and other employees; provided, that of that amount, 70 percent shall be held in the form of equity securities and the remainder shall be held ratably in securities of all other tranches of the securitization. (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 60 days of the end of the quarter and audited financial statements annually within 120 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). .